UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Amendment
No. 3 to


FORM
10-K (Formerly 10-KSB)





x ANNUAL
REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
fiscal year ended December 31, 2007





o TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
transition period from ____________ to ____________




Commission
File Number 000-51364





SINO
GAS INTERNATIONAL HOLDINGS, INC.


(Name of
small business issuer in its charter)





Utah
              32-0028823(State
      or other jurisdiction
                of
      incorporation or organization)
              (IRS
      Employer Identification No.)





No.18
Zhong Guan Cun Dong St.


Haidian
District


Beijing,
P. R. China 100083


(Address
of Principal Executive Offices) (Zip Code)





Issuer's
Telephone Number: 86-10-82600527





Securities
registered under Section 12 (b) of the Act: NONE





Securities
to be registered under Section 12 (g) of the Act:





COMMON
STOCK, PAR VALUE $.001 PER SHARE


(Title of
Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes oNo x





Check
whether the issuer is not required to file reports pursuant to Sections 13 or
15(d) of the Exchange Act. Yes oNo x




Check
whether the issuer (1) filed all reports required to be filed by Sections 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yesx Noo





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
                         o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer  ̈
            Accelerated filer  ̈
            Non-accelerated filer  ̈
              (Do not check if a smaller
              reporting company)
            Smaller reporting
              company x








Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yeso Nox




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):


Yes oNo þ





The
aggregate market value of the 9,466,785 shares of voting and non-voting common
equity stock held by non-affiliates of the registrant was $ 56,232,703 as of
June 30, 2007, the last business day of the registrant’s most recently completed
second fiscal quarter, based on the last sale price of the registrant’s common
stock on such date of $5.94 per share, as reported by The Over-The-Counter
Bulletin Board.





As of
March 23, 2009, the Registrant had 24,877,271 shares of common stock
outstanding.





EXPLANATORY
NOTE





This
Amendment No. 3 to our annual report on Form 10-K for the fiscal year ended
December 31, 2007 initially filed with the Securities and Exchange Commission
(“SEC”) on March 31, 2008 is being filed in response to SEC’s comment letter
dated February 6, 2009.








TABLE OF
CONTENTS




PAGEPART
      IItem
      1.
                    Description
      of Business
                    2Item
      1A.
                    Risk
      Factors
                    25Item
      1B
                    Unresolved
      Staff CommentsItem
      2.
                    Description
      of Property
                    25Item
      3.
                    Legal
      Proceedings
                    26Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    26PART
      IIItem
      5.
                    Market
      for Common Equity and Related Stockholder Matters
                    26Item
      6
                    Selected
      Financial Data
                    27Item
      7.
                    Managements
      Discussion and Analysis or Plan of Operation
                    27Item
      8.
                    Financial
      Statements
                    39Item
      9.
                    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                    39Item
      9A.
                    Controls
      and Procedures
                    39Item
      9B.
                    Other
      Information
                    40PART
      IIIItem
      10.
                    Directors,
      Executive Officers, Promoters and Control persons; Compliance with Section
      16(a) of the Exchange Act.
                    41Item
      11.
                    Executive
      Compensation
                    43Item
      12.
                    Security
      ownership of Certain Beneficial Owners and Management
                    44Item
      13.
                    Certain
      Relationships and Related Transactions
                    46PART
      IVItem
      14.
                    Principal
      Accountant Fees and Services
                    47Item
      15.
                    Exhibits
                    47Signatures
                    50








PART
I




Item 1. Description of
Business





Information
regarding forward-looking statements and other information in this annual
report





This
annual report and the documents to which we refer you and incorporate into this
report by reference contain forward-looking statements. In addition, from time
to time, we or our representatives may make forward-looking statements orally or
in writing. We base these forward-looking statements on our expectations and
projections about future events, which we derive from the information currently
available to us. Such forward-looking statements relate to future events or our
future performance. You can identify forward-looking statements by those that
are not historical in nature, particularly those that use terminology such as
“may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,”
“believes,” “plans,” “projected,” “predicts,” “potential” or “continue” or the
negative of these or similar terms. In evaluating these forward-looking
statements, you should consider various factors, including those described in
elsewhere in this report. These and other factors may cause our actual results
to differ materially from any forward-looking statement. Forward-looking
statements are only predictions. The forward-looking events discussed in this
report, the documents to which we refer you and other statements made from time
to time by us or our representatives, may not occur, and actual events and
results may differ materially and are subject to risks, uncertainties and
assumptions about us.





Unless
otherwise noted, all currency figures in this filing are in U.S. dollars.
References to the “PRC” or “China” are to the People’s Republic of China.
References to "yuan" or "RMB" are to the Chinese yuan (also known as the
renminbi). According to the currency exchange website www.xe.com, on March 31,
2008, $1.00 = 7.0312 yuan.





“Sino
Gas,” “we” and “the Company” refer to Sino Gas International Holdings, Inc. and
our subsidiaries or, as context requires, Sino Gas International Holdings, Inc.
alone. “Exchange Act” refers to the Securities Exchange Act of 1934, as
amended.





Unless
otherwise indicated, “2007”, “2006” and “2005” refer to the fiscal years ended
December 31, 2007, December 31, 2006 and December 31, 2005,
respectively.





Overview





We are
engaged in the development of natural gas distribution systems and the
distribution of natural gas to residential and industrial customers in small-
and medium-sized cities in the People’s Republic of China (“PRC”), through our
indirectly owned subsidiaries in the PRC, Beijing Zhong Ran Wei Ye Gas Co., Ltd.
(“Beijing Gas”) and its subsidiaries.





We
currently own and operate 24 natural gas distribution systems serving
approximately 69,860 residential and 4 industrial customers. Our facilities
include approximately 700 kilometers (“km”) of pipeline and delivery networks
with a daily distribution of approximately 70,000 cubic meters of natural gas.
We have two types of customers: (i) residential and (ii) industrial. The
following table presents, for the periods indicated, selected operating
data:




At and for the year ended
                                    December 312007
                                  
                                  
                                  2006
                                  
                                  
                                  2005Total
      gas distributed and supplied (US$ millions)
                                  
                                  
                                  7.3
                                  
                                  
                                  
                                  3.91
                                  
                                  
                                  
                                  3.92Distribution
      network (km)
                                  
                                  
                                  700
                                  
                                  
                                  
                                  390
                                  
                                  
                                  
                                  187.8Number
      of industrial customers
                                  
                                  
                                  5
                                  
                                  
                                  
                                  5
                                  
                                  
                                  
                                  4Number
      of residential customers
                                  
                                  
                                  93,708
                                  
                                  
                                  
                                  48,199
                                  
                                  
                                  
                                  23,700


2




We own
and operate natural gas distribution systems in small and medium sized cities in
Hebei, Jiangsu, Jilin and Anhui Provinces in addition to three natural gas
distribution systems in the suburbs of Beijing. Beijing is not a province but a
municipality directly under the jurisdiction of China’s State Council and has
many urban districts in the suburbs.









We
generate revenues in two ways: (i) connection fees for the interconnections to
our natural gas distribution system and (ii) the sale of natural gas. The
following table presents, for the periods indicated, the revenues generated from
each of our major categories of operations:


3





At and for the year ended
                              December 312007
                            
                            
                            2006
                            
                            
                            2005(in US$
                              millions)
                            
                            
                            (in US$
                              millions)
                            
                            
                            (in US$
                              millions)Connection
      fees (as % of total Sales)
                            
                            
                            13.0(64
                            )%
                            
                            
                            6.96(64
                            )%
                            
                            
                            6.98(64
                            )%Gas
      sales
                            
                            
                            7.3(36
                            )%
                            
                            
                            3.91(36
                            )%
                            
                            
                            3.93(36
                            )%Other
      sales
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —





Our cost
of sales consists of cost of gas sales and cost of connection. Cost of gas sales
consists of cost of natural gas purchased from the suppliers, transportation
cost, depreciation of plant and equipment, and amortization of the capitalized
construction costs as our expenditures in constructing our pipeline
infrastructure are generally capitalized as fixed assets and amortized over a
period of time. Cost of connection includes certain construction costs that are
expensed. The following table presents Beijing Gas’s costs of sales for the
periods indicated:




For the year ended Dec 31(US$ millions)
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005Gas
      costs
                        
                        
                        6.37
                        
                        
                        
                        2.95
                        
                        
                        
                        2.77Connection
      costs
                        
                        
                        3.13
                        
                        
                        
                        1.44
                        
                        
                        
                        1.36




We buy
natural gas for distribution in two forms: (i) compressed natural gas (“CNG”);
and (ii) liquefied natural gas (“LNG”). Both CNG and LNG are natural gas that
has been compressed into canisters so as to enable transportation, usually by
truck, to the point of distribution or consumption. Typically CNG is compressed
under 20.2 MPa pressure and transported at normal temperature, while LNG is
compressed at 60.6MPa pressure and transported at sub zero degree temperature.
CNG is generally transported within a distance of 300 km. There is no distance
restriction in transporting LNG. As LNG is compressed at much higher pressure
and transported at much lower temperature than CNG, the cost of compression and
processing of LNG is higher than that of CNG. Generally, if a city is located
within 300 km of our natural gas supplier, we transport CNG to the customers. We
transport LNG to a city if it is located more than 300 km away from a supplier.
Approximately 99% of the natural gas we purchase is CNG and approximately 1% is
LNG.





Our
business is generally affected by two seasonal factors: First, between December
and March, the weather is too cold in northern China for construction. For a
given gas distribution project, to avoid running into this time period, we
generally start the process of pipeline installation, which has a duration of
six to eight months, in April so as to complete the process before December. As
a result, most of our revenues from connection fees are recorded in the fourth
quarter. Second, winter is our peak season for gas sales, as our customers tend
to consume more natural gas for heating purposes.





Organization
and Structure of the Company





We
operate through our indirectly-owned subsidiaries in the PRC, Beijing Gas and
its subsidiaries.


4




As of
March 31, 2008, our corporate structure is set forth
below:










(1) The
subsidiaries of Beijing Gas are set forth below:





Name of Subsidiary
                  
                  Beijing Gas Equity Interest %Peixian
      Weiye Gas Co., Ltd
                  
                  
                  90Sihong
      Weiye Gas Co., Ltd
                  
                  
                  95Wuhe
      Weiye Gas Co., Ltd
                  
                  
                  100Changli
      Weiye Gas Co., Ltd
                  
                  
                  100Yutian
      Zhongran Weiye Gas Co., Ltd
                  
                  
                  90Weixian
      Jinli Gas Co., Ltd
                  
                  
                  100Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
                  
                  
                  100Wuqiao
      Gas Co., Ltd
                  
                  
                  95Jinzhou
      Weiye Gas Co., Ltd
                  
                  
                  95Shenzhou
      Weiye Gas Co., Ltd
                  
                  
                  95Ningjin
      Weiye Gas Co., Ltd
                  
                  
                  95Linzhang
      Weiye Gas Co., Ltd
                  
                  
                  85


5





Hengshui
      Weiye Gas Co., Ltd
                
                
                100Longyao
      Zhongran Weiye Gas Co., Ltd
                
                
                95Xingtang
      Weiye Gas Co., Ltd
                
                
                95Gucheng
      Weiye Gas Co., Ltd
                
                
                100Langfang
      Development Region Weiye Dangerous Goods Transportation Co.,
      Ltd
                
                
                95Beijing
      Chenguang Gas Ltd.
                
                
                100Xinji
      Zhongchen Gas Co., Ltd
                
                
                100Tianjin
      Chenguang Gas Co., Ltd
                
                
                100Luquan
      Chenguang Gas Co., Ltd
                
                
                100Cheng’an
      Chenguang Gas Co., Ltd
                
                
                100Nangong
      Weiye Gas Co., Ltd
                
                
                100Sishui
      Weiye Gas Co., Ltd
                
                
                95Guannan
      Weiye Gas Co., Ltd
                
                
                100Sixian
      Weiye Gas Co., Ltd
                
                
                100Baishan
      Wiye Gas Co., Ltd
                
                
                100





Organizational
History





Sino Gas
International Holdings, Inc. was incorporated under the laws of the State of
Utah on August 19, 1983 as Evica Resources, Inc. On April 5, 1984, we changed
our name to American Arms, Inc. American Arms, Inc. commenced the manufacture
and sale of weapons and laser sights. On April 12, 1988, we changed our name to
American Industries, Inc. as we were no longer engaged in the manufacturing and
sale of weapons and laser sights. American Industries, Inc. was in the business
of providing room safes for hotels.





On
February 19, 2002, we formed a subsidiary corporation named Pegasus Tel, Inc.
under the laws of the State of Delaware, in order to enter into the
telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged with
Pegasus Communications, Inc., a New York corporation, with Pegasus Tel, Inc. as
the surviving entity. On January 14, 2002 we purchased payphone assets
consisting of 29 payphones and associated equipment from the Margaretville
Telephone Company for $11,600.00.





On May
21, 2002, we changed our name to Dolce Ventures, Inc.  We were an inactive
shell between May 2002 and September 7, 2006.


6




On
September 7, 2006, the shareholders holding 72,569,764 shares of our common
stock, which constituted 72.01% of the then outstanding shares of our capital
stock, sold all of their shares to GAS Investment China Co., Ltd. (“Gas (BVI)”),
the parent company of Beijing Gas, for a cash consideration of $675,000. On the
same date, we consummated a share exchange transaction with the shareholders of
Gas (BVI), whereby we exchanged 14,361,646 shares of our Series A Convertible
Preferred Stock, par value $0.001 per share (“Series A Preferred”), which
constituted all of the then outstanding shares of our Series A Preferred, for
all of the issued and outstanding stock of Gas (BVI) held by the shareholders of
Gas (BVI). As a result of the share exchange transaction, Gas (BVI) became our
wholly-owned subsidiary, and Beijing Gas became our indirectly wholly-owned
subsidiary. In addition, as a result of the share exchange transaction, we
ceased being a shell company as such term is defined in Rule 12b-2 under the
Exchange Act and are now engaged in the development of natural gas distribution
systems and the distribution and supply of natural gas in the PRC.




On
November 17, 2006, we changed our name to Sino Gas International Holdings, Inc.
and effected a 304.44-for-1 reverse stock split which reduced the number of the
outstanding shares of our common stock from 100,770,140 to 331,002. Upon the
effectiveness of the reverse stock split, each of the 14,361,646 shares of the
then outstanding Series A Preferred was automatically converted into one share
of our common stock, resulting in all of the shareholders of Gas (BVI)
immediately prior to the share exchange owning approximately 97.7% of the
outstanding shares of our common stock immediately after the reverse stock
split, with Mr. Yuchuan Liu, the CEO of our company, owning 36.7%, Gas (BVI)
owning 1.6% and the original shareholders of Dolce Ventures, Inc. immediately
prior to the share exchange owning 0.6%.





Organizational
History of Gas (BVI) and Beijing Gas





Gas (BVI)
was incorporated on June 19, 2003 in the Territory of the British Virgin Islands
with Mr. Liu Yu Chuan as its sole shareholder. Gas (BVI) is the holding company
for Beijing Gas. Prior to the acquisition of all of the equity interests of
Beijing Gas by Gas (BVI) as described below, Gas (BVI) had no business
operations, assets or liabilities, apart from organizational expenses and
fees.




Beijing
Gas was originally formed as a limited liability company under the laws of the
PRC in 2001 under the name Beijing Yuan Wang Yu Cheng Construction Ltd., and
changed its name to its current name, Beijing Zhong Ran Wei Ye Gas Co. Ltd., in
June 2003.  On February 17, 2004, Gas (BVI) acquired all the outstanding
capital stock of Beijing Gas from its then shareholders. On July 14, 2004, Gas
(BVI) transferred 1% of the capital stock of Beijing Gas to Shen Zhen Shen Qi
Cheng Tong Investment Ltd., a limited liability company organized under the laws
of the PRC (“Shen Zhen Shen Qi”), and, simultaneously, Shen Zhen Shen Qi
invested RMB 20 million in Beijing Gas in exchange for 50% of its capital stock.
As a result, Gas (BVI) and Shen Zhen Shen Qi held 49% and 51% of the capital
stock of Beijing Gas, respectively. On April 30, 2006, Gas (BVI) acquired all of
the capital stock of Beijing Gas held by Shen Zhen Shen Qi in exchange for RMB
20.4 million. As a result of this transaction, Beijing Gas is now a “wholly
foreign owned entity” under PRC law by virtue of its status as a wholly-owned
subsidiary of Gas (BVI).




Beijing
Gas has subsidiaries, known as project companies, in four provinces, and four
branch offices in Beijing. The project companies are the operating subsidiaries
of Beijing Gas. Each project company operates as a local natural gas distributor
in a city or county, which we refer to as an operational location, pursuant to
an exclusive franchise agreement with the local government or entities
responsible for administering and/or regulating gas utilities, pursuant to which
Beijing Gas is granted the exclusive right to develop and operate natural gas
distribution systems and distribute natural gas at the operational
location.





We now
have operations in Hebei Province, Jiangsu Province, Anhui Province, and Jilin
province and in the suburbs of Beijing through our four branch offices in
Beijing, We have operations in 18 cities in Hebei, 2 cities in Anhui, 3 cities
in Jiangsu and 1 city in Jilin province. Most of them have an urban population
of less than 300,000 and are experiencing quick urbanization. Hebei Province is
the closest province to the Chinese Capital city Beijing, where our headquarters
is located. Jiangsu Province and Anhui Province are two adjourning provinces in
eastern China, which are close to Shanghai City. Jilin Province is located in
North-Eastern China.


7




Each of
the project companies is organized as a limited liability company under PRC law
with Beijing Gas holding an equity interest of 85% to 100% and an individual
shareholder nominally holding the remainder of the equity interest in such
project company. Each such individual shareholder has relinquished any and all
rights, power and interest of a shareholder in the respective project companies
under enforceable contracts. This structure was intended to comply with a PRC
law that required a limited liability company to have at least two shareholders,
which requirement was removed in January 2006. Beijing Gas intends to cause the
individual shareholders to transfer their shares in each of the project
companies back to Beijing Gas in the near future.





In
addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang Ke
Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
venture entity engaged in the business of development, licensing and sale of oil
and gas technologies and equipment, and sale of self-produced chemical
preparation for use in the exploration process of oil field. We did not derive
any material amount of revenues from this joint venture.





In 2007,
we made the following acquisitions:





On
January 15, 2007, Beijing Gas acquired 100% equity interest of Beijing Chenguang
Gas Ltd., Co. for a purchase price of 26,000,000 RMB (or approximately USD3.35
million) in cash. Beijing Chenguang became a wholly-owned subsidiary of Beijing
Gas. Beijing Chenguang is primarily engaged in the business of developing,
transfer and licensing of technologies regarding natural gas purification,
compression and transportation., as well as installation of natural gas
equipment and supply of natural gas. Mr. Zhicheng Zhou, our Chief Operating
Officer, owned 30% of Beijng Chenguang immediately prior to the acquisition. We
made full disclosure under the heading “Certain relationships and related
transactions” in this report.





On June
20, 2007, Beijing Gas acquired 100% equity interest of Guannan Zhongyuan Natural
Gas Co., Ltd. for a purchase price of 7,500,000 RMB (approximately $987,000) in
cash. Guannan is a regional natural gas distributor and developer of natural gas
distribution networks in China's Jiangsu Province. The acquisition of Guannan
includes all of the assets and customer relationships of Guannan, including
concession rights to be the exclusive natural gas distributor in Guannan County,
Jiangsu Province, for a period of 30 years beginning June 29, 2007. This
acquisition is not with related parties.




On July
9, 2007, We purchased the assets of Baishan Gas Co., Ltd., a regional
distributor and developer of distribution networks for natural gas in Jilin
Province for a price of $921,000 (RMB7,000,000). Under the asset purchase
agreement, we are responsible for paying outstanding debts of Baishan Gas Co.,
Ltd. in the amount of $4,000,000, which are due in periodic installments through
the year 2030. This acquisition is not with related parties.




Our
Industry





China’s
Macro-Economic Environment for the Natural Gas Market





Traditionally,
the PRC has relied heavily on coal and crude oil as its energy sources.
According to the China Statistical Yearbook, in 2004, coal, crude oil,
hydro-electricity and natural gas accounted for 68.0%, 22.3%, 7.1% and 2.6%,
respectively, of the PRC's total energy consumption. In 2005, the ratios were
68.9%, 21.0%, 7.2% and 2.9% respectively. Natural gas has been primarily used as
a raw material for chemical fertilizer and to operate oil and gas fields.
Accordingly, most natural gas is consumed for production of fertilizer, while
the non-production sector accounts for low percentage of final consumption. In
2005, non-production consumption of natural gas was around 7.9 billion cubic
meters, which was only a little over 15% of total natural gas consumption that
reached to 47.9 billion cubic meters (Source: National Bureau of Statistics of
China).


8





The PRC's
heavy reliance on coal is out of line with world consumption rates for the same
time period which was 26.5% in 2005 (Source: Energy Information Administration,
U.S. Department of Energy). The use of coal, however, causes air pollution and
other negative consequences to the environment. In the PRC, the heavy use of
unwashed coal has lead to large emissions of sulfur dioxide and particulate
matter. The latest air pollution study conducted by the Blacksmith Institute
shows that in 2007 two of the 10 most polluted cities in the world are located
in the PRC (Source: http://www.blacksmithinstitute.org). As such, there have
been serious environmental concerns in many countries around the world and
resulted in a global trend to reduce coal usage.





Recognizing
the serious problems caused by heavy reliance on coal usage, the PRC government
has aggressively moved to reduce coal usage by substituting coal with other,
more environmentally friendly forms of fuel, such as natural gas. In
consideration of such trends, the PRC set out a policy to raise the share of
natural gas in the country's energy mix in its Ninth 5-Year Plan
(1996-2000).  At the local government level, in many locations where
natural gas supply is available, local governments often require all new
residential buildings to incorporate piped gas connections in their designs as a
condition to the issuance of the construction or occupancy permits. Before 2000,
the gas distribution had principally been served by local municipal governments.
Since then, the industry has been open to private sector, whose investments have
fostered the wide use of natural gas in the PRC. The natural gas industry has
been deemed by the PRC government as a suitable industry for public and private
investments.





Demand
for Natural Gas in China




Currently,
natural gas consumption in the PRC accounts for less than 3% of its total energy
consumption. However, driven by environmental pressure from the demand side and
improvements in social infrastructure with economic growth, in the west in
particular, and stable energy supply, it is anticipated that the use of natural
gas will grow very rapidly in the PRC. According to the statistics of the China
National Development and Reform Commission (“NDRC”), the consumption of natural
gas as increased from 24.5 billion cubic meters in 2000 to 47.9 billion cubic
meters in 2005, which represented an average growth of 14.35% per year.
According to a research report by Merrill Lynch, demand for natural gas will
increase from 16 billion cubic meters in 2005 to 70 billion cubic meters in
2020, representing a compounded annual growth rate of 10.3%.





China’s
Natural Gas Reserves and Gas Pipeline Infrastructure





The PRC
abounds in rich natural gas reserves, which are distributed principally in
Xinjiang, Sichuan and Inner Mongolia in western and north-central China.
According to the statistics of the Energy Information Administration, proved
natural gas reserves in China are estimated to be 53,325 billion cubic feet in
2006, and 80,000 billion cubic feet in 2007.




Because
the PRC’s largest reserves of natural gas are located in western and
north-central China, it requires a significant investment in gas transportation
infrastructure to carry natural gas to eastern cities and the rest of the PRC.
Until recent years, the PRC’s natural gas consumption was limited to local
natural gas producing provinces because of the lack of national long-distance
pipeline infrastructure.




The
principal method for transportation of natural gas from a source to end users is
by means of pipelines. In order to develop the natural gas industry, it is
essential that the necessary pipeline infrastructure be in place so that natural
gas is easily accessible for distribution to end users at affordable
cost.




Under
with the PRC government’s Tenth 5-Year Plan (2001-2005), the country’s longest
pipeline, known as the West-East Pipeline, was constructed and went into
operation in January 2005. It transports natural gas to demand centers in the
southeast from deposits in the western Xinjiang province to Shanghai, picking up
additional gas in the Ordos Basin along the way. The full length of the pipeline
is about 4,200 km with a designed annual throughput capacity of 20 billion cubic
meters, a delivery pressure of 10 megapascals and 35 processing stations
along the pipeline.


9




There are
other pipelines linking smaller natural gas deposits to consumers, such as the
pipeline linking the Sebei natural gas field in the Qaidam Basin with consumers
in the city of Lanzhou, Ganshu province in the northwest, and a pipeline linking
natural gas deposits in Sichuan province in the southwest to demand centers in
Hubei and Hunan provinces in the central PRC.




In its
Eleventh 5-Year Plan (2006 - 2010), the PRC government re-affirmed its
commitment to making significant investments in the expansion of the natural gas
pipeline infrastructure over a period of 20 years.





Natural
Gas Suppliers





The
natural gas supply in China is dominated by the three large state-owned oil and
gas holding companies, namely China National Petroleum Corporation Group
(“PetroChina”), China Petroleum and Chemical Corporation Group (“Sinopec”), and
China National Offshore Oil Corporation Group (“CNOOC”). In 2006, production by
CNPC, Sinopec and CNOOC accounted for 73.7%, 14.1% and 12.2%, respectively, of
the total national production. CNPC and Sinopec own and primarily operate
onshore pipelines while CNOOC owns and operates virtually all off shore
pipelines (Source: The Institute of Energy Economics of Japan).





Natural
Gas Distributors





Before
2000, natural gas distribution had been principally served by local municipal
governments. Since then, natural gas industry has been designated by the PRC
government as a suitable industry for public and private investment and has been
open to private investment which has fueled the development of the industry and
fostered a wider use of natural gas in the PRC. In large cities where the
population exceeds 100,000, the natural gas distribution business is dominated
by state owned companies, while in cities where the population is less than
100,000, natural gas distribution is carried out by many privately owned
companies, most of which operate in just a few locations.





The
Gas Delivery Process





The
natural gas delivery process is categorized by three segments: production,
transmission and distribution, as shown in the chart below:


10









Production
involves underground exploration, drilling, extraction and purification of the
natural gas. After extraction from a gas well, natural gas is transported to
nearby refineries for removal of water and other impurities. The natural gas is
then transported from the refineries via long distance pipelines under extremely
high pressure facilitating the supply to a large number of locations near these
pipelines at high speeds. The long distance pipelines are owned and operated by
PRC state owned oil and gas exploration and production companies such as Sinopec
and PetroChina.





Distribution
companies (such as our company) distribute natural gas to end users and often
own the gas pipeline infrastructure rights of an operational location (including
the local pipelines, the processing stations, and the branch pipelines). A
distribution company purchases natural gas from oil and gas exploration and
production companies. The distribution company determines the method of
delivering natural gas to its desired destination after taking into account
factors such as the distance between the stations along the major pipeline and
delivery points and the expected demand for gas from the relevant gas supply
locations.





The
transportation of CNG and LNG involves the delivery of natural gas by trucks
from gas wells or stations located along the relevant long distance pipeline to
a processing station. Such processing stations may contain CNG or LNG pressure
regulating facilities which will depressurize the CNG or LNG to reduce the
pressure of natural gas from high pressure to medium pressure, before
transferring the natural gas to a local pipeline.


11





The
processing station is usually located on the outskirts of an operational
location for safety reasons and it provides certain ancillary
facilities:





To add
bromine to the gas to enable the detection of leakages when the gas is
transmitted through the pipelines, and




To store
gas under high, medium or low pressure to be used as reserves for future
unexpected fluctuation in demand.




High
pressure gas storage tanks usually have thicker walls and therefore, are more
expensive to construct than gas storage tanks for storage of gas under medium or
low pressure.





After
processing, the gas is transmitted under medium pressure to the local pipelines.
Local pipelines are laid within an operational location and represent the
backbone of the local gas delivery system. Different sections of the local
pipelines operate at slightly different pressures, with computer controlled
regulators controlling the flow of natural gas for delivery to end users via the
branch pipelines and customers’ inlets.




When
there is a demand for a connection of gas to a particular area within a gas
supply location, the distribution company will invest in the construction of the
branch pipelines to connect the local pipelines to the pressure regulating boxes
located in the end-users’ buildings or premises. The pressure regulating box
reduces the natural gas to a lower pressure before the natural gas is
transmitted to the customers’ inlets. Customers’ inlets transmit the natural gas
through the pressure regulating box to the end users.





Our
Strategy





Our
strategy involves a plan: (i) to expand our presence in smaller cities; (ii) to
acquire existing gas distribution systems and/or franchises; and (iii) to expand
our business upstream by developing and maintaining pipelines that connect
China’s East-West Gas Pipeline with the cities where we have our gas stations or
where other distributors own distribution networks.





(i) Expand Our
Presence in Smaller Cities; by Obtaining Additional Exclusive Franchises.
We have focused on small (with urban dwellers in the city proper less than
100,000) and medium sized (with urban dwellers in the city proper less than
300,000) , generally near a larger metropolitan area where there is little
competition to obtain a franchise, and where our franchise grants us
exclusivity. In such places in the PRC, we are in a better position to obtain
exclusive natural gas distribution system development and supply franchise
agreements in negotiating with the cities, which urgently need to provide their
citizens with energy, and usually do not have the leverage of very large cities,
which can attract multiple bidders for their franchises. Accordingly, we require
and receive an exclusive franchise entitling us to be the sole natural gas
utility in such city. Usually, our franchises are for a period of 25-30 years.
Since our founding, we have successfully obtained 26 franchises in small and
medium sized cities, of which 24 have already developed and 2 are still under
development. In 2007 alone, we were able to secure 5 development projects. We
plan to obtain and develop 5-8 of such projects per year.





(ii) Acquire
Existing Franchises and Gas Distribution Networks to Facilitate Growth.
Our expanded presence in small and medium sized cities was accomplished not only
by securing franchises and developing gas distribution networks ourselves but
also by acquiring existing franchises and networks from other operators. Of the
five locations we added in 2007, three were acquired. We believe acquisitions
will provide us opportunities for growth as
well as enable us to explore opportunities in bigger cities (with urban dweller
in the city proper more than 300,000). We are now targeting companies that have
good assets and market prospect with strategic locations but less burdened with
employees retirement liabilities. We have identified several targets and are
negotiating with some of them. We expect to complete a significant acquisition
in the near future.


12




(iii) Expand into
Upstream Business. We currently develop gas distribution networks which
deliver gas from our storage station in a particular city to residential or
industrial customers in that city. We do not have pipelines that connect the
national main pipeline that runs across China from the West to the East with the
cities where we our customers are located. We have to deliver the gas we
purchase from the main pipeline operator to our gas storage facilities in
different cities by trucks. We intend to expand into upstream business by
developing regional distribution networks to connect West-East main pipeline
with cities that are not located near the passageway of the national main
pipeline. By developing and maintaining regional pipelines, we believe we can
deliver natural gas to our customers more efficiently and with potentially
higher margins. In addition, such regional distribution networks can be used by
other gas distributors along the pipelines, which will add potential revenue
sources for us. As the development of such regional networks require a
significant capital outlay, we intend to start exploring such projects after we
raise a significant amount of funds in the future.





(iv)Raise
Additional Capital . We are in a very capital-intensive business due to
the fact that a major part of our activities is to build local natural gas
distribution networks which requires a larger capital outlay. Our estimated
capital needs for developing a natural gas distribution networks for a specific
location are approximately $5 million. We plan to undertake 5-8 projects per
year. Therefore, we need approximately $40 million of capital per year. Although
the connection fees we charge our customers provide us with the needed capital
for building local natural gas distribution networks to a large degree, they may
not provide sufficient capital if we carry out the acquisitions and upstream
expansion as we have planned. Our growth will, therefore, depend heavily on our
ability to raise additional funds. We anticipate using our financing strategy as
a competitive tool. Our goal is to duplicate the type of financing and related
financial instruments used by utilities in the United States, including the
issuance of subsidiary level, non-recourse debt, preferred stock and holding
company fixed income issuances. Such a financing plan can not only give us a
favorable cost of capital, but enhance investor returns and keep investor
dilution at a minimum.





Competitive
Advantages





We
believe we have the following competitive advantages:





(i) Better
Relationship with Natural Gas Suppliers. Many of our employees are former
employees of SinoPec and PetroChina. Therefore, we have been able to secure
contracts with these large state owned natural gas producers. These contracts
have ensured a stable supply of natural gas for us.





(ii) Experienced
Management and Technical Personnel.We have a team of senior
executives who are industry experts in managing larger Chinese petroleum and/or
gas companies with scores of years of combined experience in running our company
or managing business in this industry. Our founder and Chief Executive Officer,
Mr. Yuchuan Liu, is a natural gas industry expert with over 20 years experience
in senior management positions at PetroChina and China Gas Holdings Limited, a
Hong Kong Stock Exchange-listed PRC company. Our Chief Operating Officer, Mr.
Zhicheng Zhou, served as the director and General Manager of Beijing Chenguang
Gas Co., Ltd. from late 2002 to 2006. Our Chief Engineer, Mr. Shukui Bian, is
one of the draftsmen of the PRC national standard for urban gas supply, and was
previously the chief executive officer of the First Oil Extraction Plant of
North China Oilfield. Our company was one of the earliest to engage in the
natural gas distribution business in small and medium sized cities, and thus
having gained significant experience in this market segment.





(iii) Experienced Sales
and Marketing Team. Our sales and marketing team has gained significant
experience in working with local governments and identifying potential markets
in small and medium sized cities. Due to their effort, we have won franchises
for more than 25 locations.


13




(iv) US Capital Market
Access. By becoming a US public company, we have gained access to the US
capital market, which is the biggest and most efficient. We will be able to
raise funds, as we have done, for our expansion and growth albeit our ability to
raise funds in the US is a limited one because we have not been listed on any
major US national stock exchanges. Very few Chinese companies that are in the
natural gas distribution business have become a US public company.





Products
and Services





Currently,
we generate revenues primarily from the connection fees we charge our customers
for connecting their appliances to the pipelines in our natural gas distribution
systems which we have constructed, and fees for natural gas we charge our
customers based on usage.





Historically,
connection fees and fees of natural gas usage have constituted more than 90% of
our revenues. We recorded connection fees in the amounts of $12.97 million and
$7.22 million for the fiscal years ended December 31, 2007 and 2006,
respectively, constituting 64% and 66% of total revenues for those years. Sales
of natural gas were $7.29 million and $3.65 million for the fiscal years ended
December 31, 2007 and 2006, respectively, constituting 36% and 34% of the total
revenues for those years.




Connection
Fees





We charge
real estate developers, our customers, a flat connection fee for the
installation of gas lines to each of their apartments or housing units. The
level of connection fees varies among operational locations and is determine
based on a detailed analysis of factors such as estimated capital expenditure,
fees charged in surrounding cities, number of users, expected penetration rates,
income levels and affordability to local residents and is approved by the
relevant local state price bureau. The average of these connection fees for the
company in 2007 was approximately $286.4 per household. For industrial
customers, the connection fee is determined based on the facility capacity (on a
cubic meter per day basis 300 RMB per cubic meter). Should additional capacity
be needed, these customers are required to pay additional connection fees for
the additional capacity installed. Connection fees are usually paid in
installments, with 30% within certain days set out in the contracts after start
of project, 30% at milestones set out in the contracts, 30% upon completion and
10% guarantee which is paid after one year. Connection fees generally provide a
60-80% profit margin. The rates of connections fee are set by the local state
price bureau based on the connection fees charged by other gas distributors in
surrounding areas and can vary in different cities. In most cases, we accept the
price set by the local state price bureau. But if we find the price does not
offer a profit margin equal or greater than 20%, we will negotiate with local
governments for an increase. The local governments usually agreed to increase
our connection fees under such circumstances Our average connection fee per
household is about $276 and the connection fee in most cities is very close to
that average. Gas usage fees are also subject to the approval of the local state
price bureau. Future price increases are also subject to the same approval
process. In considering applications for an increase in gas usage charges, the
local state price bureau may consider factors such as increases in the wholesale
price of gas or operating expenses, inflation, additional capital expenditure,
and whether the profit margin remains fair and reasonable.





When
entering into master supply contracts for mass connections, we usually require
the payment of deposit from customers while the balance is payable in accordance
with the terms set out in the contracts. In the event customers default in the
payment of connection fees, we will not start the supply of natural gas until
the connection fees are paid.




The
deposit received from customers upon the signing of supply contracts generally
funds the majority of our capital costs in any new operational
location.





Gas Usage
Charges





We arrive
at gas usage charges after taking into consideration the wholesale price of gas,
operating costs, price of substitute products, internal business model margins
and the purchasing power of local residents. Gas usage charges are based on
actual usage on a per cubic meter basis. The gas usage charges per cubic meter
vary between operational locations and the payment mechanism between different
categories of customers varies.


14




Since our
inception, the majority of our residential customers have purchased gas units in
cash at our sales outlets with details of the prepaid gas units stored
electronically on a debit card. The debit card is inserted into a debit card
debit gas meter installed at the end user’s premises to activate the gas supply.
Units of gas used are deducted from the debit card. When the level of prepaid
gas units drops to a certain level (currently pre-set at three cubic meters),
the gas meter will produce a sound signal to remind the customer to replenish
the value stored in the debit card. Over 85% of our residential customers
utilize the debit card payment method. This payment method provides significant
advantages to us as all gas purchases are prepaid - not at the point of sale or
in arrears.




For those
residential customers without a debit card gas meter installed and for
commercial and industrial customers, payments for natural gas usage are made in
arrears. Gas meters that record actual gas consumption are installed at the end
users’ premises and meter readings are taken physically by our staff every
month. Monthly bills based on the prior month’s actual usage are then sent to
customers. In the event customers default in payment of gas usage charges, gas
supply will be suspended within one month of billing.





Our
Business Activities





Our major
business activities include development and construction of local gas
distribution networks, transportation of natural gas from suppliers to our
storage facilities in a given operational location, and operating and
maintaining the gas distribution networks.





Development





(i)Identifying distribution
opportunities in new operational location: Our business development team
actively explores and identifies suitable areas of service by conducting market
research on potential operational locations where the demand for piped natural
gas is desired. Because of our experience and ongoing cooperation with
governmental authorities, we also receive invitations from local governments to
bid for new natural gas projects or to take over existing natural gas
projects.




As the
piped natural gas supply industry in the PRC is still in the early stages of
development, most areas in the PRC are not yet supplied with piped natural gas
even though they may be in close proximity to natural gas sources. Due to the
capital intensive nature of new natural gas distribution projects, we are very
selective in our choices for new operational locations.





The
selection of new operational locations is determined after conducting
preliminary evaluation and studies on the target locations, and return on
investment. The criteria for any potential operational location that are
investigated and documented by us are:





1.
            Size
      and density of population.




2.
            Economic
      statistics of the targeted
locations.




3.
            Extent
      and concentration of industrial and commercial
  activities.




4.
            New
      property development in the target
location.




5.
            Projected
      levels of connection fees and gas usage
charges.


15




6.
            Extent
      of the local government’s commitment to environmental protection,
      environmental policies in place, and the local population’s awareness of
      environmental issues.




7.
            Likelihood
      of exclusive operational rights and preferential treatment on tax and
      governmental fees.




8.
            Types
      of gas supply (piped natural gas, CNG or LNG) and methods of delivery. CNG
      trucks are deployed if the gas source, or long distance pipeline, is
      located within 300 km. Generally, LNG trucks are used if the gas source,
      or long distance pipeline, is located beyond 300
  km.





9.
            For
      an acquisition of existing natural gas projects, the cost of acquisition,
      quality of assets and/or business are also valued. In addition, the
      liabilities of the business are analyzed along with any other perceived or
      actual problems encountered.





Based on
the findings of the investigation, our business development team will decide
whether to make a recommendation to management for approval to proceed with
discussions and negotiations on a new project. We have conducted dozens of
preliminary evaluations since our inception in 2003. We have an aggregate of 24
completed or partially completed operational locations.





(ii) Securing a New operational
location. Once we have approved a potential natural gas distribution
project in an operational location, we normally set up a local independent
subsidiary, also know as a project company, to administer the project for its
lifetime. We then prepare and submit a detailed gas project proposal to the
local government and commence negotiations on major issues such as the granting
of exclusive rights or rights of first refusal to supply gas to that location,
proposed connection fees and gas usage charges and whether any tax and other
concessions or favorable policies will be granted by the local government. Once
established, the project company will conduct a series of marketing and
promotional campaigns (which may include joint promotional campaigns with the
local government) to increase public awareness of piped natural gas in the
operational location. Concurrently, we begin actively seeking out potential
customers in the operational location and negotiate the terms of supply
contracts with the aim of entering into supply contracts as soon as possible
with such customers.




(iii)Construction.





(a) Design stage.The design of the gas
pipeline infrastructure for a natural gas distribution project includes the
processing stations, the local pipelines and other ancillary facilities such as
gas storage tanks. It is carried out by a government approved design institute
in accordance with our requirements and specifications. It also takes into
account the local population size, the development of the economy, the
utilization of energy resources and the environmental conditions. The master
design is subject to approval by the local city construction department. The
design stage normally takes two to three months.




(b) Construction Stage.Once the design is
approved, we invite independent qualified contractors to tender bids for the
construction work. The selection criteria for the contractors include their
qualifications, experience, expertise, reputation, familiarity with the local
environment, prior experience with us and price. We generally enter into turnkey
contracts with independent contractors for construction, installation and
maintenance of the natural gas pipelines. We pay a down payment with the
remainder to be paid upon completion of the project. At the time of entering
into turnkey contracts, we source raw materials such as piping, gas regulating
equipment and machinery. We have strict quality control procedures for the
sourcing of supplies for all construction purposes.


16




Our
internal engineers and independent external inspectors monitor the entire
construction process to ensure that each stage of construction meets our quality
and safety standards and the relevant regulatory requirements.





For a
given operational location, although the gas pipeline infrastructure is designed
to cover the entire operational location, our construction program focuses on
early gas delivery to areas of concentrated customer demand within such
operational location. This ensures that natural gas supply can begin as soon as
the essential gas pipeline infrastructure and facilities such as the processing
stations are completed. Construction work in a target area will gradually extend
to cover the whole operational location, which typically takes two to five
years.





Operation





Once the
necessary gas pipeline infrastructure is in place in a given operational
location, we begin the design and construction of the branch pipelines and
customers’ inlets pursuant to gas supply contracts with customers. The designs
of branch pipelines and customers’ inlets are normally prepared by us, reviewed
by a government approved design institute, and carried out by external
contractors. Upon completion of the construction of the branch pipelines
and customer inlets in the operational location, we begin to supply and sale
natural gas and related services to customers within the operational location
pursuant to supply contracts with such customers. The natural gas to be supplied
to the residential or industrial customers is carried by trucks with canisters
that contain CNG or LNG, to our storage facilities in various operational
locations for storage, decompression and gasification. From those storage
facilities, the gas is transported through our pipeline system to our end
users.




Intellectual
Property





We do not
hold any registered trademarks or patents. We have developed a proprietary
natural gas compression process that allows us to effectively and economically
compress natural gas and distribute it. .





We own
and operate a website under the internet domain name
www.sino-gas.com.





Research
and Development





We have
eight full-time employees engaged in the company-sponsored research and
development efforts. These employees specialize in the fields of energy,
mechanical and electronic engineering. For the fiscal year ended December 31,
2007 and 2006, $1,013,400 and $543,500, respectively, on R&D activities.
Areas that are targets of our ongoing research and development activities
include:





Methodology
and practices to increase operating efficiency and safety
standards.




Expansion
of the applications for natural gas, such as gas-fuelled air conditioners,
washing machines and dryers, and the use of CNG in motor vehicles.




Improvements
in gas storage and transportation systems especially the reduction of the size
of the storage facilities.




Sales
and Marketing





Our main
sales office, which is located in Beijing, has three staff led by the Vice
President of Marketing and is responsible for managing our overall sales
policies and devising our marketing strategy. They are responsible for
developing and maintaining accounts with major industrial customers and large
real estate developers. They regularly visit potential customers and conduct
meetings with them to see if there is need and to introduce the advantages of
using natural gas.


17





We have
approximately 25 sales and marketing staff at our operational locations who
target residential customers by working with local neighborhood committees and
government agencies. In addition, they coordinate with our national office in
with national office in targeting industrial customers and local developers. We
establish a project company at each operational location and the local sales and
marketing team for each project company works together with the main office team
to structure an appropriate plan accommodating the specific needs and
circumstances of the operational location. Our marketing team plays an active
role in lobbying the relevant government authorities during the negotiation
stage.





The sales
and marketing team is responsible for company image and brand building, as well
as promoting the advantages and concept of using natural gas as a necessary part
of modern day life. Once established, a project company will implement a series
of promotional campaigns (which may include joint promotional campaigns with the
local government) to increase public awareness of piped natural gas in an
operational location. At the same time, the project company begins to actively
seek out potential customers in the operational location and negotiate the terms
of supply contracts with the aim of entering into supply contracts with such
customers as soon as possible.




Our
Customers





We have
two principal types of customers: (i) residential customers and (ii) industrial
customers.





Residential
Customers





Natural
gas is primarily used by residential owners for cooking as well as water and
space heating. We market directly to property developers, government departments
and organizations, private companies and state-owned enterprises, as these
entities enter into master supply contracts with us for the connection of gas to
all the units within a residential development (new or existing, owned by such
entities or their respective employees). These entities are responsible for
making, or they coordinate with the end users to facilitate our efforts in
collecting the advance payment of connection fees, while gas usage charges are
paid by the individual end users. With new residential developments, connection
fees are collected in advance by an installment of 30% upon the signing of the
contracts. An additional 30% is colleted at milestones set in the contracts and
an additional 30% is collected upon completion of the project. Usually, we will
have collected ninety percent payment of connection fees by the time when
construction is completed regardless of whether the units are sold or occupied.
The remaining 10 percent is paid one year after the completion and any deduction
of warranty expenses. The actual supply of gas commences after the unit is
occupied.




We also
connect to existing buildings formerly without piped natural gas supplies.
Representatives of the buildings will consult individual households as to
whether they wish to have piped natural gas supply and coordinate the collection
of connection fees from the end users on our behalf. Both connection fees and
gas usage charges are payable in advance by the individual end users. We build
pipelines to connect these customers to our gas storage facilities and supply
gas at market price after receiving payment. The inlets that are located inside
the home and gas appliances are owned by the end users, with one-year quality
guarantee by us. We maintain the pipelines outside the end user’s homes. The
contracts are generally renewable on a yearly basis.




18




At
present, we have approximately 317 master supply agreements for the supply of
gas to 63,000 end users in Beijing Hebei, Jiangsu, Jilin and Anhui. Our top five
residential customers, who are developers or owners of residential areas, are
shown below:




Percentage of
                              Connections
                              Fees for the year ended
                              December 31,Customers
                            
                            2007
                            
                            
                            2006Shanghai
      Datun Energy Holdings
                            
                            
                            21.28
                            %
                            
                            
                            36.43
                            %Huabei
      Oil Management Bureau
                            
                            
                            12.06
                            %
                            
                            
                            -
                            %Hebei
      Ji Heng Yuan Group
                            
                            
                            5.47
                            %
                            
                            
                            -
                            %Shi
      Jia Zhuang Jin Shi Real Estate Co.
                            
                            
                            3.84
                            %
                            
                            
                            -
                            %Jinzhou
      Real Estate Co.
                            
                            
                            3.12
                            %
                            
                            
                            -
                            %Total
                            
                            
                            46.83
                            %
                            
                            
                            *65.24
                            %


* the
percentage of the top five of 2006





Industrial and Commercial
Customers





Our
industrial customers use natural gas primarily for heating, air conditioning,
water heating and cooking purposes. These customers we target include owners of
hotels, restaurants, office buildings, shopping centers, hospitals, educational
establishments, sports and leisure facilities and exhibition halls. Natural gas
has a wide variety of applications for industrial customers such as fuelling
industrial boilers, furnaces, ovens, incinerators, foundries and steamers as
well as water and space heating in staff canteens and dormitories within the
industrial customers’ premises. We enter into supply contracts with these
customers for the distribution of gas to their premises, and both connection
fees and gas usage charges are borne by such customers.





The table
below presents information about our industrial customers for the periods
indicated:




Percentage of Sales
                          Fiscal year ended
                          December 31,Customers
                        
                        2007
                        
                        
                        2006Hebei
      Zhong Gang Steel
                        
                        
                        30.4
                        %
                        
                        
                        51.78
                        %Tang
      Shan Chang Sheng
                        
                        
                        4.00
                        %
                        
                        
                        9.04
                        %Elite
      (Lang Fang) Textile
                        
                        
                        0.90
                        %
                        
                        
                        0
                        %Huabei
      Machine Factory
                        
                        
                        2.88
                        %
                        
                        
                        0
                        %Hebei
      Ji Heng Yuan
                        
                        
                        0.76
                        %
                        
                        
                        0
                        %Total
                        
                        
                        38.87
                        %
                        
                        
                        61.02
                        %





During
the fiscal year ended December 31, 2007, our largest two customers were Heibei
Zhong Gang Steel and Tang Shan Chang Sheng.





Materials
and Supplies





Natural
Gas





The
principal supplies purchased for our business are natural gas, pipes, machinery
and equipment. Purchase of natural gas represented 67.1% and 65% of our total
purchase of supplies for the fiscal years ended December 31, 2007and 2006,
respectively. Generally, approximately 99% of the natural gas we purchase is CNG
and approximately 1% is LNG.





Our
principal CNG supplier has been the Fourth Oil Extraction Plant of the North
China Oilfield (the “North China Oilfield”), a subsidiary of PetroChina. Our LNG
supplier has been Henan Zhong Yuan Lu Ye Advanced Technology Ltd. Co. (“Henan
Zhong Yuan”), a subsidiary of SinoPec. Historically, we have purchased
approximately 90% of our total purchases of CNG from North China Oilfield and
100% of our total purchases of LNG from Henan Zhong Yuan.




19


We have
supply contracts (with terms from 1 to 3 years renewable but no fixed price,
which price is set indirectly by the PRC National Development and Reform
Commission (“NDRC”) irregularly and can be passed along to the end customers)
with these suppliers and have not experienced any shortage of natural gas supply
in the past. To prepare for growth, we have also entered into agreements with
new suppliers to meet our growing demands.  These contractual relationships
with our suppliers allow us to pursue natural gas distribution projects in a
wide range of operational locations.





The
wholesale price of natural gas is agreed upon between the suppliers and us with
reference to the wellhead price which is determined by NDRC with approval from
the PRC State Council, distance of transportation, purification fees and the
supplier’s operating costs. The wellhead price of natural gas is currently set
at $0.12 per cubic meter with a 10% allowance for upward or downward adjustments
as a result of negotiations between suppliers and distribution companies, such
as Beijing Gas. Generally, we are only required to pay for the actual quantity
purchased and there is no penalty should we purchase less than the stated
amount.




Piping,
Machinery and Equipment





Piping,
machinery and equipment constitute 60-70% of our construction cost. We purchase
such supplies through a bidding process which is administered by the procurement
committee. Potential suppliers are evaluated on their proposed terms including
technical specifications, price, payment terms and post-sale services and the
procurement committee keeps a scoring system based on these parameters. After
validation of the various suppliers’ service and capabilities for stable supply,
we acquire the needed materials and parts from the supplier offering the best
terms.




We
purchase pipes of various size and thickness domestically for installation in
different segments of our natural gas pipeline infrastructure according to
specifications that comply with PRC standards and regulations. Payments for
equipment, pipes and machinery are purchased with credit terms ranging from 30
to 90 days. We generally do not purchase gas appliances except gas meters which
we purchase in bulk directly from manufacturers in China and maintain a limited
inventory of them. We also provide repair and maintenance service to the gas
appliances supplied. We generally provide a one-year warranty of our gas
distribution system to our customers, during which time we provide free
check-ups of the pipeline and repair for any appliances we
provided.





In 2007,
we purchased approximately $11,242,557 of pipes, machinery and
equipment.




Competition





Since our
inception, we have focused on supplying natural gas to small and medium sized
cities in the PRC where the average urban residents in the city proper is
300,000 and below, where the natural gas penetration rate is typically 0%, and
where we are able to obtain exclusivity for natural gas distribution from the
local government. In entering into these small and medium sized cities, we are
generally authorized to be the sole supplier of natural gas by the local
governments pursuant to franchise agreements for a typical term of 25 to 30
years. This differs from the bigger natural gas distribution companies which
have focused on a few areas with large populations. The larger cities are very
competitive markets that tend to offer less flexibility for advantageous pricing
arrangements. For a typical small city project, our initial investment is only
about $500,000 with an average internal rate of return of 31% over the life of
the project. Due to our smaller city focus where the operating cost is low and
competition is much less intense, we believe we generate profit margins and
returns at or above industry-average levels.





As we
compete principally with small- to medium- sized private companies in the
natural gas distribution industry, the information about our competition and
competitive position is limited. Based on the information available to us, we
estimate that there are approximately 200 small- to medium- sized private gas
distribution companies in the PRC. Most of these companies target local towns,
rather than take the approach that we do, of targeting cities in different
provinces. Also, most of these companies operate an average of three or four
natural gas distributions systems, as compared to the 20 natural gas
distribution systems that we operate.




20


Based on
the division of the administrative districts in the PRC as of December 31, 2005,
it has been estimated that there are approximately 2,862 smaller cities in the
PRC with urban dwellers in the city proper between 100,000 to 300,000. Among
them, approximately 800 smaller cities have the potential to be supplied with
natural gas and 100 smaller cities have already been supplied with natural gas.
Among the 100 smaller cities where natural gas is already available, Beijing Gas
is the distributor to 24 of them, and, therefore, we believe we have the largest
market share among our peer businesses that target the natural gas market among
smaller cities.




We
believe compete with the following companies directly:




Ticker
                                      
                                      06 Revenue
                                        (in
                                        $millions)
                                      
                                      
                                      06 Net
                                        Income
                                        (in
                                        $millions)Towngas
      China Co., Ltd (Panva Gas)(1)
                                      
                                      1083.HK
                                      
                                      
                                      409
                                      
                                      
                                      
                                      19Xinao
      Gas Holdings Ltd(2)
                                      
                                      2688.HK
                                      
                                      
                                      *296
                                      
                                      
                                      
                                      *32Shanghai
      Tongda Energy Group(3)
                                      
                                      
                                      
                                      
                                      **560
                                      
                                      
                                      
                                      **25China
      Gas Holdings Limited(4)
                                      
                                      0384.HK
                                      
                                      
                                      **125
                                      
                                      
                                      
                                      **9Zhengzhou
      Gas Co. Ltd(5)
                                      
                                      3928.HK
                                      
                                      
                                      *63
                                      
                                      
                                      
                                      *10


* By the
end of June 30, 2007


** By the
end of September 30, 2007





(1)
Towngas China Company Ltd., formerly Panva Gas Holding Limited, is supplier of
gas, including liquefied petroleum gas (LPG) and natural gas in eight Chinese
provinces, where over 40 companies of the Group are providing gas fuel
services.





(2) Xinao
Gas Holdings Limited is principally engaged in the investment in, and the
operation and management of, gas pipeline infrastructure and the sale and
distribution of piped and bottled gas in China with operations in four
divisions: gas connection, sales of piped gas, distributions of bottled LPG and
sales of gas appliances.





(3)
Shanghai Tongda is engaged in the construction and operation of urban CNG, LNG,
and LPG. It operates in over 15 cities across provinces through 15
subsidiaries.





(4) China
Gas Holdings Limited (China Gas) is an investment holding company. The Company
is an operator of natural gas services principally engaged in the investment,
operation and management of city gas pipeline infrastructure, long-distance,
high-pressure pipelines, distribution of natural gas to residential, commercial,
industrial and vehicle users, construction and operation of oil stations, and
gas stations, as well as liquefied natural Gas (LNG) liquefaction plants, and
development and application of oil and natural gas related technologies. The
Company has four operating divisions: property investment, financial and
securities investment, gas connection and sales of piped gas.





(5)
Zhengzhou Gas Company Limited is an investment holding company. The Company is
principally engaged in the sales of natural gas, pressure control equipment and
gas appliances to customers, and the construction of gas pipelines and the
provision of repairs and maintenance of gas pipelines services. The gas
appliances available for sales include gas stoves, water heaters and
wall-attached stove.




21


Safety
and Quality Control





Safety
Control





We are
focused on safety, have implemented a safety system and set up a safety
department to oversee safety issues for all of our operations. We carry out
routine inspection of the branch pipelines, customers’ inlets, gas meters and
gas appliances at the customers’ premises twice annually. These semi-annual
inspections are free unless major repairs are required in which case we charge
the customers for labor, replacement parts and other materials used for the
repairs.





We
believe in educating users about safety procedures. Before gas is actually
supplied, we provide a thorough explanation of safety procedures to end users,
hold regular seminars, and distribute brochures and booklets on safety. We have
a 24-hour telephone help line for enquiries and reporting of emergency
matters.





In order
for us to monitor the operations of the pipelines for abnormal gas usage, gas
leakages, or any other irregularities, we collect information about the
temperature, pressure and volume of gas from key points along the local
pipelines. The information is collected in the control center located in the
head office of each operational location for analysis. We use process control
instruments known as Supervisory Control and Data Acquisition systems, in which
a number of small detectors are installed along the pipelines to collect
information and process the data electronically in real time at the control
center. Each project company conducts a major inspection of its pipelines,
processing station(s) and other equipment at least once annually. If gas
leakages or any other irregularities are detected, we will take remedial action
immediately.




Due to
the strict implementation of safety control procedures, there have been no major
accidents which have resulted in serious injury or death since our
inception.





Quality
Control





Quality
control begins in the design and construction phase of the natural gas supply
infrastructure. Our quality control team regularly makes inspection visits and
conducts tests to ensure that the construction work meets our required standards
as well as national and local regulations.





We also
have strict quality control procedures for the sourcing of raw materials. We
only purchase from our approved list of qualified suppliers and such suppliers
have fulfilled the relevant requirements in accordance with national
standards.





In order
to monitor the quality of gas purchased by us, we obtain gas composition reports
regularly from our gas suppliers with data on important measures such as the
heat content and composition of impurities in our gas supply. We also conduct
regular tests on the gas purchased in order to verify its quality.





Insurance





We
currently do not carry any product liability or other similar insurance, nor do
we have property insurance covering our plants, manufacturing equipment and
office buildings expect compulsory insurance and fixed-sum insurance for cars
and other vehicles. We plan to purchase property insurance to cover our
manufacturing plants, equipment and office buildings in the near future when
such insurance policies are available.




We
maintain social insurance for our staff and employees in accordance with
relevant requirements under PRC law.




22


Government
Regulations





Pricing
Regulations





We
purchase natural gas from natural gas wholesalers, which are state-owned
enterprises and which must comply with PRC natural gas pricing regulations. The
wholesale price of natural gas payable by distribution companies, such as
Beijing Gas, to the suppliers of natural gas is comprised of three components,
the wellhead price, the pipeline transportation tariff and the purification fee.
The wellhead price is fixed by NDRC, and is currently set at $.12 per cubic
meter with a 10% allowance for upward or downward adjustments for negotiation
between suppliers and distribution companies. The pipeline transmission tariffs
are determined by reference to the investment costs of the relevant long
distance pipeline, depreciation, wear and tear and the distance of delivery. The
purification fee is based on the actual purification costs of the suppliers.
Both the pipeline transmission tariffs and the purification fee must also be
approved by the NDRC.




Pricing
of Natural Gas - US$ per cubic meter




2003
                  
                  
                  2004
                  
                  
                  2005
                  
                  
                  2006
                  
                  
                  2007Wellhead
                  
                  $
                  0.09
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.11
                  
                  
                  $
                  0.11Pipeline
                  
                  $
                  0.09
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.09
                  
                  
                  $
                  0.09Purification
                  
                  $
                  0.01
                  
                  
                  $
                  0.01
                  
                  
                  $
                  0.01
                  
                  
                  $
                  0.01
                  
                  
                  $
                  0.01Total
                  
                  $
                  0.19
                  
                  
                  $
                  0.19
                  
                  
                  $
                  0.18
                  
                  
                  $
                  0.21
                  
                  
                  $
                  0.21




The price
we charge our residential customers for natural gas is based on the wholesale
price plus cost and a profit margin of 10-15% and must be approved by the local
price bureau.





Operational
and Construction Permits





In the
PRC, companies in the gas distribution business must also obtain an operational
permit from the local municipal government to begin operation. In addition, a
construction permit must be obtained if such gas distribution company also
engages in construction. In both cases, the local municipal government will
review the qualifications and experience of the management and technical staff
of the distribution company and consider whether the distribution company is
capable of fulfilling the operational and construction standards.





As of
February 18, 2008, Beijing Gas and most of our project companies and branch
offices have the necessary operational permits. We are still in the process of
getting natural gas distribution permits for six of our projects. We believe
failure to obtain such permits in time for those projects will not have a
materially adverse effect on our operations.





Safety
Regulations





As a
natural gas distributor, Beijing Gas is regulated by the Administrative Rules on
the City Gas Safety jointly promulgated by the PRC Ministry of Construction,
standards set by Standard Bureau and Fire Safety Bureau of PRC Ministry of
Public Security effective in May 1991.  According to such rules, the
manufacture, storage, transportation, operation, usage of city gas, design and
construction of gas-related projects, and the manufacture of gas-related
facilities shall be subject to relevant safety requirements and qualifications.
Fuel service station standards are subject to regulation by the PRC’s Ministry
of Construction, General Administration of Quality Supervision, and Bureau of
Inspection and Quarantine. Required certificates are issued upon satisfactory
inspection of service stations. In addition, there are various standards that
must be met for filling stations, including handling and storage of gas, tanker
handling, and compressor operation. These standards are regulated by local
construction and gas operations regulating authorities. Inspections are carried
out and certificates for the handling of dangerous agents are issued by relevant
local authorities. As of December 31, 2007, most of our project companies have
received such certificates. There are six project companies that are still in
the process of obtaining such certificates. We believe failure to obtain such
certificates in time for those projects will not have a materially adverse
effect on our operations.




23


Environmental
Assessment





Under
China’s Environmental Regulations, each of our project location should obtain an
environmental assessment report which asses the environmental impact of the
operations of the project. The report must be approved by the relevant
authorities. As of February 18, 2008, most of our project companies have
obtained such reports. We are still in process of obtaining such reports for
five project companies. We believe failure to obtain such reports in time for
those projects will not have a materially adverse effect on our
operations.





Income
Taxes




Pursuant
to the tax laws of PRC, general enterprises are subject to income tax at an
effective rate of 33%. Beijing Gas is in the natural gas industry, whose
development is encouraged by the government. However, PRC income tax regulations
provide that any company operating in the natural gas industry enjoys a
favorable tax rate. In addition, Beijing Gas has been approved as a high
technology company and as such has been enjoying preferential income tax
treatment under the PRC’s income tax policies. Under these policies, Beijing Gas
was exempt from corporate income taxes for the first two years commencing from
its first profitable year, and thereafter will be entitled to a 50% tax
reduction for the succeeding three years. Our first profitable tax year was
2003. Accordingly, our income is subject to a reduced tax rate of 7.5% from 2005
to 2007. Beginning in 2008, our income tax rate will be 7.5%. The subsidiaries
of Beijing Gas are subject to the effective rate of 15% - 33%, but almost all
income is earned by Beijing Gas.





Foreign Currency
Control




Under
certain regulations in the form of public notices issued by the PRC State
Administration of Foreign Exchange, or SAFE, our shareholders who are PRC
resident entities or individuals are subject to certain registration
requirements due to the status of GAS (BVI) and Sino Gas under Chinese law as
offshore special purpose companies, or SPCs. These regulations would prohibit
Beijing Gas from distributing dividends or profits to GAS (BVI) and/or Sino Gas
as SPCs unless we comply with the registration requirements set forth by SAFE.
As of the date hereof, Mr. Liu Yu Chuan, our President, Chief Executive Officer
and Chairman of the Board, has completed the registration with the SAFE and has
been issued a SAFE certificate in August 2006. We are in the process of
determining whether there are additional shareholders who are subject to the
SAFE regulations and whose compliance status will have a material effect on
our ability to remit any of our profits out of the PRC as dividends or
otherwise.





Employees




As of
March 31, 2008, we had approximately 367 full-time employees, including 61
management personnel, 55 approximately 50 technicians, 30 engineers and 15
research and development personnel. One employee holds a doctorate degree, 3
employees hold a master’s degree, and 102 employees hold a bachelor’s
degree





As
required by applicable Chinese law, we have entered into employment
contracts with all of our employees. We have also entered into a confidentiality
agreement with all of our employees under which such employees are prohibited
from disclosing confidential information of the Company or using it for other
purposes than the benefit of the Company. Directors, officers, mid-level
managers and some key employees in sales and R&D are required to sign a
non-compete agreement which prohibits them from competing with the Company while
they are employees of the Company and not working for a competitor within one
year of termination and working in the industry for two years after their
employment with the Company is terminated.




24


Our
employees in China participate in a state
pension arrangement organized by Chinese municipal and provincial
governments. We are required to contribute to the arrangement at the
rate of 20% of the average monthly salary. In addition, we are required by
Chinese law to cover employees in China with other types of social insurances.
Our total contribution may amount to 30% of the average monthly salary. We have
purchased social insurances for all of our employees. The social insurance we
paid in 2006 and 2007 is shown below:




At and for the year ended
                        December 31,2007
                        (in USD)
                      
                      
                      2006
                        (in USD)Amount of social insurance
                      
                      
                      233,113.58
                      
                      
                      
                      77,104.80





Item
1A. Risk Factors.





Not
required.





Item 1B.
Unresolved Staff  Comments





Not
required to respond because we are a smaller reporting company.





Item 2. Description of
Property





Description
of Property





We have
offices at all operational locations. The facilities are added with each new
project or operational location as part of the execution of the
project.





All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. A “land use
right” allows the holder the right to use the land for a specified long-term
period of time and confers to the holder all the incidents of ownership of the
land during that period. In the case of land used for industrial purposes, the
land use rights are generally granted for a period of 50 years. This period may
be renewed at the expiration of the initial and any subsequent terms. Granted
land use rights are transferable and may be used as security for borrowings and
other obligations. We hold land use rights for two parcels of land registered
under their names, and lease land use rights from third parties for additional
parcels of land that are used for its gas distribution projects. In addition, we
lease office buildings and warehouse facilities for our business
operations.





Set forth
below is the detailed information regarding these land use rights registered
under the names of Beijing Gas or its subsidiaries:




Registered owner of land use right
                          
                          Location & certificate of
                            land use right
                          
                          Usage
                          
                          (approximate)
                            square meters
                          
                          Date of
                            Issuance or
                            Grant
                          
                          Expiration
                            DateBeijing Gas
                          
                          South side of
                            Huang He
                            Road, Cai
                            Yuan Town,
                            Wu Qiao
                            County
                            
                            Wu Guo Yong
                            (2003) Zi
                            Di Chu No.
                            208
                          
                          Other
                            commercial
                            use
                          
                          1,520
                          
                          November
                            25, 2003
                          
                          November
                            25, 2043Yu Tian Country Zhong Ran
                            Wei Ye Gas Ltd.
                          
                          Between East
                            side of Yu
                            Zun West
                            Road and
                            South side of
                            Guan Qu,
                            Yu Tian
                            County
                            
                            Yu Tian Guo
                            Yong
                            (2004) Zi Di
                            No. 097
                          
                          Industrial
      use
                          
                          2,674.5
                          
                          June
      8,
                            2004
                          
                          May
      21,
                            2054




25


In
addition to the land use rights described above, we have the right to use an
aggregate of approximately 36,283 square meters for our operations either
through grants or transfers of land use rights or lease arrangements. The rights
range in duration from six to 20 years. The documentation of some of these land
use rights have not yet been completed. We expect to complete the documentation
for these land use rights in the near future.




As of
December 31, 2007, we own 720 km of high-pressure underground pipeline. We also
own and operate 33 natural gas stations with accompanying buildings, gas
compression facilities and other equipment, including 22 cars, 19 trucks, 28
containers (3000 m3 ), 6
containers (450 m3 ), and
59 containers (300 m3 ). We
also lease two trucks from PetroChina.





We
believe that all our properties and equipment have been adequately maintained,
are generally in good condition, and are suitable and adequate for our
business.




Item 3. Legal Proceedings





To our
knowledge, there is no material litigation pending or threatened against
us.




Item 4. Submission of Matters to a Vote of
Security Holders




None.


PART
II




Item 5. Market for Common Equity and Related
Stockholder Matters





Our
common stock is quoted on the OTC Bulletin Board under the symbol SGAS.OB.
There was no public trading activity in our shares during the past two fiscal
years through September 7, 2006. Since our September 7, 2006 reverse merger with
GAS Investment China Co., Ltd. (“Gas (BVI)”), there has been some minimal
trading activity in our shares. The following table provides the high and low
sales prices for our common stock as reported for the periods
indicated.




Such
prices are based on inter-dealer bid and asked prices, without markup, markdown,
commissions, or adjustments and may not represent actual
transactions.




CALENDAR QUARTER ENDED
                    
                    HIGH
                      BID(S)
                    
                    
                    LOW BID(S)September 30, 2006*
                    
                    $
                    0.04
                    
                    
                    $
                    0.014December
      31, 2006
                    
                    $
                    5.00
                    
                    
                    $
                    3.60March
      31, 2007
                    
                    $
                    11.12
                    
                    
                    $
                    6.1June
      30, 2007
                    
                    $
                    8.0
                    
                    
                    $
                    4.0September
      30, 2007
                    
                    $
                    6.0
                    
                    
                    $
                    3.7December
      31, 2007
                    
                    $
                    4.5
                    
                    
                    $
                    2.75First
      Quarter of 2008 (as of March 20, 2008)
                    
                    $
                    4.0
                    
                    
                    $
                    2.02




* We
completed our reverse merger with GAS Investment China Co., Ltd. (“Gas (BVI)”)
on September 7, 2006.




26


As of
March 28, 2008, there were 682 holders of record of our common
stock.




To date,
we have neither declared nor paid any cash dividends on shares of our common
stock. We presently intend to retain earnings to finance the operation and
expansion of our business and do not anticipate declaring cash dividends in the
foreseeable future.




Item
6. Selected Financial Data





Not
required.




Item 7. Management’s Discussion and Analysis
or Plan of Operation




The
following discussion and analysis of our consolidated financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes of Beijing Gas appearing elsewhere in
this annual report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, those set forth
under "Risk Factors" in our registration statement filed with the SEC on January
11, 2008.





Overview





We are
engaged in the development of natural gas distribution systems and the
distribution of natural gas to residential, and industrial customers in small-
and medium-sized cities in China, through our indirectly-owned subsidiaries in
the PRC, Beijing Gas and its subsidiaries.–





Beijing
Gas is organized as a holding company with 26 subsidiaries, known as project
companies, in four provinces, and four branches offices in Beijing, as shown on
the corporate structure chart provided below. The project companies are the
operating subsidiaries of Beijing Gas. Each project company operates as a local
natural gas distributor in a city or county, known as an operational location,
under an exclusive franchise agreement between Beijing Gas and the local
government or entities in charge of gas utility, pursuant to which Beijing Gas
formed the project company to operate the natural gas distribution project in
the operational location. These exclusive franchise agreements last between
20-30 years.





In
addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang Ke
Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
venture entity engaged in the business of development, licensing and sale of oil
and gas technologies and equipment, and sale of self-produced
products.




Through
its subsidiaries, Beijing Gas is a natural gas distributor, principally engaging
in the investment, operation and management of city gas pipeline infrastructure,
in the distribution of natural gas to residential an industrial users, in the
construction and operation of natural gas distribution networks, and in the
development and application of natural gas related technologies. Beijing Gas and
it subsidiaries own and operate 24 natural gas distribution systems serving
approximately 69,860 residential and four commercial or industrial customers.
Our facilities include approximately 700 km of pipeline and delivery networks
with a designed daily capacity of approximately 70,000 cubic meters of gas.
Currently, we are constructing an additional four natural gas distribution
systems. We own and operate natural gas distribution systems primarily in Hebei,
Jiangsu, Jilin, Anhui and Beijing.




27


Below is
our corporate structure:











(1)See “Organizational History of Gas
(BVI) and Beijing Gas” under “Description of Business” of this annual
report regarding the subsidiaries of Beijing Gas.





Executive
Summary





Economic
& Industrial Trend





We
generate revenue from two sources: connection fees for constructing connections
to our natural gas distribution network, and sales of natural gas. Our
connection activities are closely related to the development of real estate
industry in our targeting cities in China, given the fact that almost all of our
connection fees are from new residential apartments. Natural gas facilities in
new apartments are often required by local governments, who aim to promote the
use of natural gas to improve local residents’ life quality.





We have
experienced high growth of our connection activities since inception of our
business, thanks to Chinese real estate boom in the past five years. We see no
major factors that will change the trend of real estate industry in the coming
year. Therefore we expect to continue to see growth of household connections,
especially in small-to-medium sized cities where the real estate market is at an
early developing stage.





If
Chinese real estate market does slow down in the future, our connection business
would be negatively affected as a result of fewer new household
connections.





Our gas
users are composed of industrial and residential users. Gas sales from
residential users are much less affected by economic and industrial factors and
would maintain stable growth in the future, due to the increasing pool of our
residential customers. Gas sales from industrial users is subject to the
operating performance of the end industrial user and development of new users.
Gas sales to our industrial users have increased 70% during 2007, as we
developed one new user and two of our existing users have expanded their
production capacity. Our biggest industrial user, Hebei Zhong Gang Co. Ltd, is
increasing production capacity, which is expected to increase our daily gas
sales from 30,000 cubic meters to 45,000 cubic meters in 2008. As we develop
into more cities, we expect to add one to two industrial users in the coming
year.




28


Material
Opportunities





The gas
distribution market is quite fragmented in the small (population less than
100,000)-to-medium (population between 100,000 to 300,000) sized cities. We have
been in active talks with potential project targets. The size of the projects
varies from small cities, like the ones we have, to medium-sized cities. For
small city markets, many of them are still untapped or undeveloped. The
development of these markets are generally considered major growth components of
the company.





Regarding
medium-sized or large cities, most of them have already been developed by large
distributors or are still operated by state-owned companies. Acquisition
opportunities exist for those still run by state-owned companies, as the central
government encourages suppliers to turn them into privately-owned companies. The
acquisition of these markets would have material impact on the company,
increasing the company’s assets and revenues significantly. The company needs to
raise money to fund these acquisitions.




Material
Challenges





There are
vast number of small-to-medium sized cities left undeveloped, but the
competition is intense, as there are many small new players in the market
attracted by the profitability and growth potential of the business. Meanwhile,
from time to time, we are also facing competitions from stronger competitors, as
large city markets are getting saturated and our competitors are beginning to
expand into smaller cities.





We are
facing limited opportunities in developing into first-tier cities in China, as
most of them have already been taken by other large gas distributors, such as
Xin’ao Gas Co. Ltd (largest in China) in the past decade.





Still,
potential users in small and medium-sized cities need to be educated by the
benefits of natural gas. It takes some time for them to get to know how natural
gas can improve the quality of life. This is especially true for new markets,
where there is no use of natural gas. Small cities tend to be more reluctant for
use of new energies than large cities where residents depend more on coal,
rather than natural gas.





China’s
energy market is highly regulated by the government, with regard to purchase
price and sale price of natural gas. Whenever there is an adjustment to purchase
price by the government, gas distributors would increase the sale price
correspondingly, subject to a public hearing and government approval. The
increase of natural gas price in China is lagging behind that in the
international markets, which has soared in the past year. The Chinese government
has seldom adjusted natural gas and we can not rule out the possibilities of
increase of natural gas price by the government in the future. Even though we
can adjust the sale price accordingly after the increase of purchase price,
passing the increase to end users. However, it would make natural gas more
expensive, as compared to other alternative energies. Thus this increase of
price will deter our business development.





Risks
in Short-Term and Long-Term





In each
of the cities we are developing and aiming to develop, the real estate market is
the major factor that impacts us. Most of our residential customers are the new
home buyers. If the real estate market turns downward, the demands for new homes
would decrease, resulting in fewer natural gas connections, and thus negatively
impacting our business.





To reduce
the company’s heavy dependence on connection fees, the company is looking at
opportunities to diversify its business by expanding into related areas, such as
pipeline and gas station business. However, we do not expect to develop into
those areas in large scale any time soon and it may take some time for those
business to become our major business.




29


RESULTS
OF OPERATIONS





Year
Ended Dec 31, 2007 Compared to Year Ended Dec 31, 2006





In the
year ended December 31, 2007, our company achieved strong increases in financial
and operational results. Our net revenues and gross profit were $20,267,756 and
$10,870,718, respectively, representing an increase of 86.44% and 66.13% from
those in the previous year. Operating income in 2007 was $8,052,785,
representing an increase of 53.97% from 2006. These results were largely
attributed to the strategies the company has pursued:




1)
            Focus
      on small- to mid-sized cities each with a population of no more than one
      million, where there is little competition to obtain a franchise, and
      where our franchise grants us
exclusivity.





2)
            Secure
      contracts for long-term supplies of natural gas from major gas suppliers
      in China at favorable prices and on favorable terms, which would support
      the continuous expansion of our customer
base.





3)
            Finance
      our operations using a well-designed financing plan that will give us a
      favorable cost of capital.





4)
            Employ
      the best management with rich experience in the industry and improve
      operating efficiency and corporate
governance.




For the 12 months ended
                        December 31,2007
                      
                      
                      2006
                      
                      
                      ChangeUS$
                      
                      
                      US$
                      
                      
                      %Net
      Revenues
                      
                      
                      20,267,756
                      
                      
                      
                      10,870,718
                      
                      
                      
                      86.44
                      %Gross
      Profit
                      
                      
                      10,768,004
                      
                      
                      
                      6,481,576
                      
                      
                      
                      66.13
                      %Operating
      Income
                      
                      
                      8,052,785
                      
                      
                      
                      5,229,948
                      
                      
                      
                      53.97
                      %Net
      Income
                      
                      
                      7,707,370
                      
                      
                      
                      5,073,289
                      
                      
                      
                      53.01
                      %Gross
      Margin
                      
                      
                      53.12
                      %
                      
                      
                      59.62
                      %Net
      Margin
                      
                      
                      38.03
                      %
                      
                      
                      47.52
                      %




Net
Revenues





We
generate revenues from two sources: connection fees for constructing connections
to our natural gas distribution network, and sales of natural gas.





Total net
revenues for the twelve months ended Dec 31, 2007 were $20,267,756, compared to
$10,870,718 for the same period in 2006, representing an increase of 86.44%. The
increase was due to new customers’ connecting to our gas distribution network
and new customers’ purchasing our natural gas. In 2007, we connected 39,306 new
residential households to our gas distribution network, resulting in total
connection fees of $12,973,148 and bringing the number of our total connected
households to 87,537 as of the end of 2007. Gas sales during the same period
amounted to 25.89 million cubic meters, or $7,294,608. In comparison, we
connected 24,534 new residential households to our gas distribution network
throughout 2006, resulting in total connection fees of $6,958,216. Gas sales
during the period amounted to 13.83 million cubic meters, or
$3,912,502.




For
      the 12 months ended December 31,2007
                    
                    
                    2006
                    
                    
                    Change(In
      $ million)
                    
                    US$
                    
                    
                    %
                    
                    
                    US$
                    
                    
                    %
                    
                    
                    %Net
      Revenues
                    
                    
                    20.27
                    
                    
                    
                    100
                    %
                    
                    
                    10.87
                    
                    
                    
                    100
                    %
                    
                    
                    86.44
                    %Connection
      Fees
                    
                    
                    12.97
                    
                    
                    
                    64
                    %
                    
                    
                    6.96
                    
                    
                    
                    64
                    %
                    
                    
                    86.35
                    %Gas
      Sales
                    
                    
                    7.30
                    
                    
                    
                    36
                    %
                    
                    
                    3.91
                    
                    
                    
                    36
                    %
                    
                    
                    86.7
                    %




30


The
financing we obtained in 2006 occurred later than expected and provided a
smaller amount of funds than we had expected. The result of the reduced amount
and later date of the financings was that we missed some of the opportunities we
had originally targeted.





The high
rate of net revenue growth in 2007 was due to our efforts to consolidate and
enhance penetration of the existing markets, and our successful acquisitions of
Beijing Chenguang Gas Co., Ltd. and Guannan Zhongyuan Natural Gas Co., Ltd.,
which were adequately funded by our financings closed in late 2006. We expect
this trend to continue as we are actively looking for acquisition targets and
plan on raising additional funds. This rate of growth may not be sustained in
the future if we are not able to raise adequate funds for the
acquisitions.





We are
considering several potential acquisition targets, which would substantially
contribute to our revenues and net income if successfully acquired. We are very
close to reach an agreement with a medium-sized city and we are in talks with
two to three other small-sized city projects. There are various means for us to
raise money for potential acquisition, including equity financing, debt
financing, domestic bank loans. We have signed term sheet with one debt
financing investor raising approximately $20 million for the acquisition of the
potential target projects.  The definitive agreements are expected to
be signed in the second quarter of 2008. Meanwhile, we are engaged with domestic
banks targeting on borrowing approximately $20 million.





The high
percentage of connection fees as compared to gas sales was due to the fact that
we have started many new projects and we were able to collect connection fees
upfront from new customers. We expect the ratio of connection fees to the total
to continue for some time because we are in the growth stage and will develop
several new projects per year. As the projects are fully developed and the
opportunities for new projects decrease, the percentage of gas sales relative to
the total revenue will increase and the percentage of connection fees relative
to the total revenues will decrease.





To reduce
the company’s heavy dependence on connection fees, the company is also looking
at opportunities to diversify its business by expanding into related areas, like
pipeline and gas fueling stations. However, we do not expect to develop into
those areas in large scale any time soon and it may take some time for those
businesses to become one major driver of the natural gas industry.





Connection
Fees





Connection
fees in 2007 were $12.97 million, representing an increase of 86.35% over the
year 2006, accounting for 64% of the total net revenue compared with
approximately 64% for the same period in 2006. With regard to the source of
connection fees, $11.26 million, or 87% of total connection fees, came from the
development of new residential users. We connected 39,306 residential users in
2007, an increase of approximately 79.87% from 2006. Industrial users
contributed a relatively small $1.72 million, or 13%, of our total connection
fees in 2007, an increase of 145.71% from prior one-year period.




For
      the 12 months ended December 31,(in
      US$ millions)
                    
                    2007
                    
                    
                    2006
                    
                    
                    ChangeUS$
                    
                    
                    %
                    
                    
                    US$
                    
                    
                    %
                    
                    
                    %Connection
      Fees
                    
                    
                    12.97
                    
                    
                    
                    100
                    %
                    
                    
                    6.96
                    
                    
                    
                    100
                    %
                    
                    
                    86.35
                    %Residential
      Users
                    
                    
                    11.26
                    
                    
                    
                    87
                    %
                    
                    
                    6.26
                    
                    
                    
                    90
                    %
                    
                    
                    79.87
                    %Industrial
      Users
                    
                    
                    1.72
                    
                    
                    
                    13
                    %
                    
                    
                    0.70
                    
                    
                    
                    10
                    %
                    
                    
                    145.71
                    %




Such
substantial increase was primarily attributable to the following two
aspects.





31


First of
all, we tried our best to develop more residential customers in those cities of
which we have obtained franchise of natural gas distribution systems. Our
invested projects in the twelve months ended Dec 31, 2007 connected 32,479 new
residential households, resulting in approximately $9.3 million to our total
connection fees. In comparison, during the same period of 2006, we connected
24,534 new residential households to our gas distribution network, resulting in
total connection fees of $6.5 million.





Secondly,
Quality projects merger was judged to be another important factor in our good
performance. Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in
January 2007, connected 4,256 new residential households in the twelve months
ended Dec 31, 2007, resulting in approximately $1.3 million to our total
connection fees. Guannan Weiye Gas Co., Ltd. (“Guannan Weiye”), acquired in
July 2007, connected 2,571 new residential households in the twelve months ended
Dec 31, 2007, resulting in approximately $0.68 million to our total connection
fees.





The table
below is a breakdown of our top four customers by connection fees:




Customers
                    
                    Connected
                      Household Users
                      (thousand)
                      (thousand)
                    
                    
                    Connection Fees:
                      ($ million)
                    
                    
                    Percentage of
                      Connection Fees
                      (%)Shanghai
      Datun Energy Holdings
                    
                    
                    8.7
                    
                    
                    
                    2.76
                    
                    
                    
                    38.23
                    %Huabei
      Petrol Bureau
                    
                    
                    2.5
                    
                    
                    
                    0.59
                    
                    
                    
                    8.17
                    %Jinshi
      Real Estate Co.
                    
                    
                    1.3
                    
                    
                    
                    0.50
                    
                    
                    
                    6.93
                    %Jiangsu
      Hongze Lake Farm
                    
                    
                    1.4
                    
                    
                    
                    0.40
                    
                    
                    
                    5.54
                    %





At
present, we have several projects under negotiation that show great growth
potential, and we have signed Letter of Intent for three projects. It is
anticipated that the completion of the acquisition will bring the company
altogether around 19,000 new residential customers in the coming year, which
constitutes the new major sources of connection fees.





Gas
Sales





In terms
of volume, we sold 25.89 million cubic meters of natural gas in 2007, compared
with 13.84 million cubic meters in 2006. In terms of value, gas sales were $7.29
million, accounting for 36% of total net revenue in 2007, representing nearly an
increase of 90% over the year 2006. Gas sales to residential users increased
93.26%, from $0.89 million in 2006 to $1.72 million in 2007. Gas sales to
industrial users increased 32.09%, from $2.15 million in 2006 to $2.84 million
in 2007. Gas sales to commercial users increased 213.95%, from $0.86 million in
2006 to $2.73 million in 2007.




For
      the 12 months ended December 31,2007
                    
                    
                    2006
                    
                    
                    Change($
      million)
                    
                    US$
                    
                    
                    %
                    
                    
                    US$
                    
                    
                    %
                    
                    
                    %Gas
      Sales
                    
                    
                    7.29
                    
                    
                    
                    100
                    %
                    
                    
                    3.91
                    
                    
                    
                    100
                    %
                    
                    
                    86.44
                    %Residential
      Users
                    
                    
                    1.72
                    
                    
                    
                    23
                    %
                    
                    
                    0.89
                    
                    
                    
                    23
                    %
                    
                    
                    93.26
                    %Industrial
      Users
                    
                    
                    2.84
                    
                    
                    
                    39
                    %
                    
                    
                    2.15
                    
                    
                    
                    55
                    %
                    
                    
                    32.09
                    %Commercial
      Users
                    
                    
                    2.73
                    
                    
                    
                    38
                    %
                    
                    
                    0.86
                    
                    
                    
                    22
                    %
                    
                    
                    213.95
                    %




Such
substantial increase was primarily attributable to the following two
aspects.





First of
all, our invested projects maintained steady and rapid development. During the
twelve months ended Dec 31, 2007, 15.74 million cubic meters of gas were sold,
resulting in approximately $4.53 million, 62.17% of our total gas sales. In
comparison, during the same period of last year, 13.84 million cubic meters of
gas were sold, resulting in approximately $3.91 million.




32


Secondly,
Quality projects merger was judged to be another important factor in our good
performance. Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in
January 2007, sold 10.15 million cubic meters of gas during the twelve months
ended Dec 31, 2007, resulting in approximately $2.76 million, 37.83% of our
total gas sales.





The table
below is a breakdown of our major industrial customers for gas consumption in
2007.




Industrial
      Customers
                    
                    Gas Usage
                      (million
                      cubic
                      meters)
                    
                    
                    Gas Usage
                      ($ million)
                    
                    
                    Percentage
                      of Gas Sales
                      (%)Hebei Zhonggang Steel Co., Ltd.
                    
                    
                    7.35
                    
                    
                    
                    2.21
                    
                    
                    
                    30
                    %Tangshan
      Changsheng Ceramic Factory
                    
                    
                    0.97
                    
                    
                    
                    0.29
                    
                    
                    
                    4
                    %The
      First Machine Factory of Huabei Petrol Bureau
                    
                    
                    0.77
                    
                    
                    
                    0.21
                    
                    
                    
                    3
                    %Elite
      (Langfang) Textile Corporation
                    
                    
                    0.22
                    
                    
                    
                    0.06
                    
                    
                    
                    1
                    %Hebei
      Jihengyuan Group Ltd.
                    
                    
                    0.15
                    
                    
                    
                    0.05
                    
                    
                    
                    1
                    %





Gas sales
of $2.21 million were contributed by a single industrial project, Hebei
Zhonggang Steel Co., Ltd. (“Hebei Zhonggang”), which started to use gas at the
beginning of 2006. The gas consumption of Hebei Zhonggang has increased to 7.35
million cubic meters in 2007 from 5.24 million cubic meters in 2006. Throughout
2006, daily gas consumption by Hebei Zhonggang was roughly 15,000 cubic meters.
In 2007, daily gas consumption by Hebei Zhonggang has increased to roughly
20,000 cubic meters.





Since the
profit margin is only 2% for gas sales to commercial customers, much lower than
the approximately 15% profit margin for sales to industrial and residential
users, our company is going to refine the gas sales structure in the coming
year. We will endeavor to include more valuable industrial customers and
intentionally reduce sales to commercial customers, which made up a larger
percentage of total gas sales in 2007, especially under the circumstances of
insufficient gas supply.





It is
anticipated that the acquisition of the medium-sized city project with which we
are in talks and have signed the Letter of Intent will bring our company
additional 40 million cubic meters of gas usage in 2008.





Cost
of Revenues





Cost of
revenues in fiscal year 2007, which includes cost of connection and cost of gas
sales was $9.50 million, an increase of $5.11 million, or 116.4%, from $4.39
million in fiscal year 2006.




For
      the 12 months ended December 31,2007
                    
                    
                    2006
                    
                    
                    Change($
      million)
                    
                    US$
                    
                    
                    %
                    
                    
                    US$
                    
                    
                    %
                    
                    
                    %Cost
      of Revenues
                    
                    
                    9.50
                    
                    
                    
                    100
                    %
                    
                    
                    4.39
                    
                    
                    
                    100
                    %
                    
                    
                    116.4
                    %Connection
      Cost
                    
                    
                    3.13
                    
                    
                    
                    33
                    %
                    
                    
                    1.44
                    
                    
                    
                    33
                    %
                    
                    
                    117.4
                    %Gas
      Cost
                    
                    
                    6.37
                    
                    
                    
                    67
                    %
                    
                    
                    2.95
                    
                    
                    
                    67
                    %
                    
                    
                    115.9
                    %





Cost of
Connection




Our cost
of connection during the twelve months ended Dec 31, 2007 was $3.13 million, or
33% of total cost of revenues. By comparison, the cost of connection during the
same period of 2006 was $1.44 million, or 33% of total cost of
revenue.





Cost of
connection increased around 117.4% from the same period in 2006, due to both the
expansion of our operations and the increased cost of gas station maintenance
resulting from the development of our gas stations.





Cost of
connection includes depreciation of major pipelines, the cost of courtyard
pipelines, valves, gas meters, and installation and maintenance
fees.




33


Considering
the city's overall planning and the long-term interests of our company, the
capacity of the gas pipeline network we designed to distribute gas for a city
usually greatly exceeded the number of households we served at the very
beginning, which makes the cost of connection, specifically the depreciation of
fixed assets and maintenance cost greatly increase. However, with connection of
more households to the gas pipeline, the average cost to each household will be
gradually reduced.





Cost of Gas
Sales




The cost
of natural gas sales includes the purchase and transportation of natural gas and
depreciation of delivery trucks. The cost of gas sales increased 115.9% to $6.37
million during the twelve months ended Dec 31, 2007 from the same period in
2006, when it was $2.95 million. This increase, which outpaced the 86.44%
increase in sales of natural gas during the same interval, is largely due to the
addition of gas delivery trucks acquired for approximately CNY 12 million ($1.64
million), the depreciation of which added to our cost of natural gas sales. We
believe that the impact of that depreciation will be gradually reduced as our
business and customer base grow.





Connection
fees has a much higher gross margin than Gas Sales. That is why there is a
larger percentage of Gas Cost in total Costs of Revenues, 67% for the year 2007,
than Connection Cost, 33%.





For the
twelve months ended Dec 31, 2007, we have purchased a total of 16.81 million
cubic meters of natural gas, about 66% of which were purchased from North China
Oil Field Fourth Oil Extraction Plant of Petro China.




The
purchase price that gas distributors pay for natural gas, which is set by the
PRC government, is approximately CNY 1.6 to 1.9 ($0.22 to $0.26) per cubic
meter. We signed a ten-year gas supply agreement in 2003. It is tentatively
prescribed that every year Petro China supplied a total of 10 million cubic
meters of natural gas at CNY 1.55 ($0.212) per cubic meter between April 1 and
October 31 and CNY 1.65 ($0.226) per cubic meter during the rest of the year. At
the beginning of each year in the ten-year contract period, we negotiate with
Petro China on the price and supply amount according to market
conditions.





Langfang
Development Zone Wei Ye Hazardous Goods Transportation Co. Ltd, one of our
subsidiaries, is responsible for our gas transportation, and transportation cost
per cubic meter is relatively stable at CNY 0.55 ($0.075) per cubic meter.
Management believes that this transportation cost per cubic meter is likely to
remain constant in spite of the increased depreciation costs from the newly
purchased vehicles described above, because the vehicles will allow delivery of
additional natural gas to customers in sufficient numbers to offset those
costs.





The table
below details our major gas suppliers in 2007:





Gas
      Supplier
                    
                    Gas Purchase
                      (million cubic
                      meters)
                    
                    
                    Gas Purchase
                      ($ million)North China Oil Field Fourth Oil
      Extraction Plant of Petro China
                    
                    
                    11.17
                    
                    
                    
                    2.05Beijing
      Gas Group Co., Ltd.
                    
                    
                    3.12
                    
                    
                    
                    0.75Tianjin
      Dagang Oilfield Transportation Co., Ltd.
                    
                    
                    1.04
                    
                    
                    
                    0.27Henan
      Zhong Yuan Green Energy High-Tech Co., Ltd.
                    
                    
                    0.71
                    
                    
                    
                    0.24Hebei
      Natural Gas Co. Ltd
                    
                    
                    0.77
                    
                    
                    
                    0.17




34


Gross
Profit





For the 12 months ended December 31,2007
                    
                    
                    2006
                    
                    
                    Change($ million)
                    
                    US$
                    
                    
                    %
                    
                    
                    US$
                    
                    
                    %
                    
                    
                    %Gross
      Profit
                    
                    
                    10.77
                    
                    
                    
                    100
                    %
                    
                    
                    6.48
                    
                    
                    
                    100
                    %
                    
                    
                    66.13
                    %Connection
                    
                    
                    9.85
                    
                    
                    
                    91.4
                    %
                    
                    
                    5.51
                    
                    
                    
                    85
                    %
                    
                    
                    78.77
                    %Gas
                    
                    
                    0.92
                    
                    
                    
                    8.6
                    %
                    
                    
                    0.97
                    
                    
                    
                    15
                    %
                    
                    
                    -5.157
                    %





During
the twelve months ended Dec 31, 2007, gross profit was $10.77 million, an
increase of approximately 66% from the same period of 2006. Gross profit from
connection fees is $9.85 million for the first twelve months of 2007, accounting
for 91.4% of total gross profit. In comparison, gross profit from connection
fees was $5.51 million for the twelve months of 2006, accounting for 85% of
total gross profit. Gross profit from gas sales was $0.92 million, accounting
for 8.6% of total gross profit, compared to $0.97, 15% of total gross profit
million in the same period of 2006.




Gross
margin during the twelve months ended December 31, 2007 is 53.13%, compared to
59.62% during the same period in 2006.





Gross
margin for connection fees for year 2007 was 75.91%, compared to 79.17% in 2006.
The decrease of connection gross margin are mainly because we built gas
distribution infrastructure which can be used for 25-30 years by the total
potential residential households in our operating cities and now only a small
proportion of residential households have been connected. As a result, the
depreciation under the cost of connection is relatively higher. As we develop
more households in the cities, the margin will be improved.





Gross
margin for sales of natural gas was 12.62% in 2007, compared with 24.81% during
the same period of 2006, due to the relatively higher depreciation for delivery
trucks described above.





Selling
and Marketing Expenses





Our
selling and marketing expenses in the twelve months ended Dec 31, 2007 were $609
thousand and approximately 3% of our net revenues, compared with $95.8 thousand,
or 1 % of net revenues in the same period of 2006.





In 2007,
we acquired Beijing Chenguang which owns four subsidiaries and Guannan Weiye,
and we incorporated five new subsidiaries. The expansion of our company led to
greatly increased staff salary, social insurance cost, travel and communications
cost, and depreciation of fixed assets, which are attributable to increase of
selling and marketing expenses.





General
and Administrative Expenses





General
and administrative expenses were $2.11 million for the twelve months ended Dec
31, 2007, which was 82.23% higher than $1.16 million for the same period last
year.





The new
subsidiaries will definitely bring income of long-term. Nevertheless, the
expenses from business operation occur simultaneously. Therefore, a good expense
to revenue ratio was unable to be achieved currently. In 2007, our expense to
revenue ratio is 10.39%, representing a slight decline compared to 10.63% in
2006 owing to our improvement in management.





The
increase was largely due to the increase in the number of operating subsidiaries
we own, which led to increases in salary, social insurance, traveling expenses
and other expenses. The increase was also due in part to largely increased
depreciation relating to new assets described above. We believe an upward trend
in general and administrative expenses is inevitable in 2008.


35





Operating
Income





The
operating income in 2007 was $8.05 million, representing an increase of 53.89%,
compared to the operating income of $5.23 million in 2006.





Our
company enjoyed a satisfying performance due to a prominent increase in revenues
and a faster revenues growth than general and administrative expenses
growth.





Income
tax




Income
tax was $0.53 million in 2007, compared to $0.42 million in 2006.





For 2007,
the income tax rate applicable to Beijing Gas, the main subsidiary of Sino Gas
in China, is 7.5%. Beijing Gas is classified as a foreign high-tech enterprise
by the tax regulatory authority, and therefore has enjoyed a favorable tax rate
for the past five years, with an income tax rate of zero in 2004 and 7.5% from
2005 to 2007. The income tax rate is expected to be 15%, the standard rate for
foreign high-tech enterprises.




The
income tax rate of our subsidiaries is 18-33%, except for Beijing Chenguang and
Beijing Gas. Beijing Chenguang has also been classified as a foreign high-tech
enterprise and is subject to the favorable income tax rate of 7.5% from 2006 to
2008.





Net
Income





Net
income in the twelve months ended Dec 31, 2007 was $7.71 million, representing
an increase of 52.07% from $5.07 million in the same period in 2006. The
increase can be attributed to the continued growth of our existing markets and
the acquisitions we have made.





Net
income margin is 38%, compared with 46.64% for the same period last year. The
decrease was mainly due to our substantial increase of cost and
expenses.





Liquidity
and Capital Resources




Cash and
cash equivalents were $10.92 million as of December 31, 2007, an increase of
$7.28 million over $3.64 million of cash and cash equivalents one year earlier.
The major source of cash was from the Company’s financing and operating
activities.





We have
the following major financing activities during the period of 2007: we completed
equity financing of $18.77 million in September, 2007 and the net proceeds of
the financing for the company is $13.79 million; in May we received $3 million
in gross proceeds and $2.3 million in net proceeds from the exercise of warrants
by investors; Beijing Gas, the main subsidiary of Sino Gas in China, took out a
one year loan in the amount of CNY 20 million (approximately $2.7 million),
accruing interest at an adjustable rate (currently at 6.0225% per year), with
interest payable quarterly, from Industrial Bank, Beijing Branch; during the
quarter ended March 30, 2007, we repaid an CNY 20 million (approximately $2.7
million) short-term loan from Shenzhen Development Bank.





Cash
Flows





Cash
flows from operating activities during the twelve months ended Dec 31, 2007 is
$14.30 million, an increase of $12.14 million from $2.16 million in 2006, which
is owing to our effective management of accounts receivable.





Cash
flows from investing activities during the twelve months ended Dec 31, 2007 is
$25.16 million, an increase of $16.02 million from $9.14 million in 2006. We
used the funds raised for acquisitions and project developments. During the year
of 2007, we have paid out about CNY 70.81 million (approximately $9.6 million)
for investment and acquisition.




36




The table
below is a breakdown of Cash Outflow from Investing Activities in
2007:





Beijing
      Chenguang Gas Ltd.
                  
                  $
                  3,413,328Wuhe
      Weiye Gas Co., Ltd.
                  
                  $
                  393,846Gucheng
      Weiye Gas Co., Ltd.
                  
                  $
                  393,846Nangong
      Weiye Gas Co., Ltd.
                  
                  $
                  393,846Sixian
      Weiye Gas Co., Ltd.
                  
                  $
                  393,846Baishan
      Wiye Gas Co., Ltd.
                  
                  $
                  1,969,228Yuxian
      Jinli Gas Co., Ltd.
                  
                  $
                  325,579Guannan
      Weiye Gas Co., Ltd.
                  
                  $
                  918,973Xinji
      Zhongchen Gas Co., Ltd.
                  
                  $
                  385,969Shijiazhuang
      Chenguang Gas Co., Ltd.
                  
                  $
                  257,312Luquan
      Chenguang Gas Co., Ltd.
                  
                  $
                  257,312Cheng’an
      Chenguang Gas Co., Ltd.
                  
                  $
                  192,984





Cash
flows from financing activities during the twelve months ended Dec 31, 2007 is
$17.08 million, an increase of $7.22 million from $9.86 million in
2006.





Natural
gas distribution is a typical capital-intensive industry, which requires a large
amount of capital for the construction of pipelines and gas stations, purchase
of transportation vehicles etc. while the investment would be got back in the
following year with increasing new household connections. Under the organic
growth model (growth by the Company without outside funding), the Company can
develop new city projects by using the money generated from existing cities. The
Company would be constrained by inadequate capital when developing into bigger
cities or making Merger &Acquisition activities, under which situation the
company needs to raise money to finance its business
expansion.





Accounts
Receivable





Accounts
receivable as of December 31, 2007 were $7.32 million, representing a decrease
of $0.79 million from $6.53 million as of December 31, 2006. Accounts receivable
accounted for 36.09% of net revenues, compared to 60.11% in 2006. The
considerable decrease was owing to the fact that we attach great importance to
the management and control of accounts receivable.





Our
account receivable is expected to gradually decrease during the first six months
of 2008 due to our seasonal business cycle, in which many accounts receivable
are recorded upon completion of construction projects in the fourth quarter, and
are collected in the second quarter of the following year. The term of most of
our accounts receivable is one year. As of the end of the second quarter of
2007, accounts receivable dated from 2006 had been mostly collected, and the
remainder were primarily warranty payments. A warranty payment is the final
payment that a customer makes for a construction project. It consists of the
final 10% of the total project cost, and it becomes payable one year after
construction has been completed, provided that no significant problems with the
construction have arisen during the year.




The table
below is a breakdown of our 10 largest accounts receivable as of December 31,
2007.




37




Baishan
      Jiehe Development & Construction Co., Ltd.
                  
                  $
                  200,844Shuqian
      Mingwei Development & Construction Co., Ltd.
                  
                  
                  241,998Peixian
      Jiannan Real Estate Development Co., Ltd.
                  
                  
                  313,367Sihong
      Jinwan Construction Co., Ltd.
                  
                  
                  316,101Xiuzhou
      Shenyuan Real Estate Development Co., Ltd.
                  
                  
                  337,038Guannan
      Construction Co., Ltd.
                  
                  
                  345,360Lianyuangan
      Baoli Development Co., Ltd.
                  
                  
                  357,665Jianshu
      Province Farms
                  
                  
                  421,405Huabei
      Oil Management & Machine co., Ltd.
                  
                  
                  553,365Hebei
      Zhonggang Steel Co., Ltd.
                  
                  
                  592,135$
                  3,681,282





Notes
Receivable




Notes
receivable of $0.83 million as of December 31, 2007 is the Note issued by Hebei
Zhonggang for its use of gas. The Note will be duly honored by
bank.




Inventory




Inventory
of $0.21 million as of December 31, 2007 was comprised of the spare parts of
Maintenance equipment stored for Langfang Development Zone Wei Ye Hazardous
Goods Transportation Co. Ltd., steel gas storage tanks, and natural
gas.





Prepayments




Prepayments
of $0.32 million as of December 31, 2007 were consist entirely of the
prepayments for gas purchasing in accordance with the purchase and sale contract
we signed with the gas suppliers.





Fixed
Assets




Fixed
Assets as of December 31, 2007 was $26.23 million, an increase of $10.94 million
from $15.29 million in 2006. The table below is a breakdown of our fixed assets
at cost:





2007
                      
                      
                      2006At CostGas
      Pipelines
                      
                      $
                      18,885,734
                      
                      
                      $
                      8,255,231Motor
      Vehicles
                      
                      
                      4,874,685
                      
                      
                      
                      2,204,621Machinery
      & Equipment
                      
                      
                      885,997
                      
                      
                      
                      273,943Buildings
                      
                      
                      1,405,638
                      
                      
                      
                      89,799Leasehold
      Improvements
                      
                      
                      68,942
                      
                      
                      
                      47,543Office
      Equipment
                      
                      
                      105,336
                      
                      
                      
                      67,774Less
      Accumulated depreciation
                      
                      
                      (1,653,771
                      )
                      
                      
                      (330,381
                      )$
                      24,572,565
                      
                      
                      $
                      10,608,530




Other
Payables





Other
payables as of December 31, 2007 were $10.4 million, an increase of $8.6 million
from the end of 2006. This increase is due to the fact that the former operator
of Baishan city gas distribution system we acquired in July transferred its
fixed assets valued at around $3.85 million to our company.




Off-balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.




38




Item 8. Financial
Statements




Our
financial statements begins on page F-1 of this annual report.




Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure





On August
30, 2006, our Board of Directors approved the dismissal of Robison, Hill &
Co. (“Robison") as our registered independent certified public accounting firm
effective on September 7, 2006. Concurrent with this action, our board of
directors appointed Samuel H. Wong & Co., LLP as our new registered
independent certified public accounting firm.





The audit
opinions of Robison, Hill & Co. on the financial statements for the fiscal
years ended December 31, 2004 and 2005 did not contain an adverse opinion, a
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles, except that the report of Robison, Hill &
Co. for the fiscal years ended December 31, 2004 and 2005 indicated conditions
which raised substantial doubt about our ability to continue as a going
concern.





Samuel H.
Wong & Co., LLP have audited our consolidated financial statements for the
years ended December 31, 2007, 2006 and 2005. The audit opinions of Samuel
H. Wong & Co., LLP did not contain an adverse opinion, a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles.




Item 9A. Controls and
Procedures





Management’s
Report of Disclosure Controls and Procedures





Our
management is responsible for establishing and maintaining adequate disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act and have designed disclosure controls and procedures or caused
disclosure controls and procedures to be designed under its supervision in order
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, as applicable. Due to its
inherent limitations, disclosure controls and procedures may not prevent or
detect material misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Under the
supervision of and with the participation of our Chief Executive Officer and our
Chief Financial Officer, our management conducted its evaluation of the
effectiveness of our Company’s disclosure controls and procedures as of December
31, 2007.  Based on that evaluation, our management concluded that, as
of December 31, 2007, our Company’s disclosure controls and procedures was not
effective due to the  material weaknesses described
below.




Management’s
Report of Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act and have designed internal control over financial reporting or
caused internal control over financial reporting to be designed under its
supervision in order to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, as
applicable. Due to its inherent limitations, internal control over financial
reporting may not prevent or detect material misstatements. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.





Under the
supervision of and with the participation of our Chief Executive Officer and our
Chief Financial Officer, our management conducted its evaluation of the
effectiveness of our Company’s internal control over financial reporting as of
December 31, 2007 using the criteria in theInternal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that evaluation, our management concluded
that, as of December 31, 2007, our Company’s internal control over financial
reporting was not effective due to the material weaknesses described
below.





(1) The
Company has not yet established a comprehensive Code of Conduct and Ethics (the
“Code”) which is applicable to all Company directors, officers and
employees.





(2) Our
Internal Audit Department has not taken an active role in the conduct of its
activities due to insufficient resources. The annual plan, budget, and specific
procedures to perform the internal audit function has not been developed, and
the anti-fraud audit plan has not been developed either.





(3) Our
Audit Committee was not comprised of sufficient independent directors who are
"independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act. Our Audit Committee did not appoint a member who qualifies as an
"audit committee financial expert" as defined in Item 401(e) of Regulation S-K.
Our written Audit Committee Charter was not submitted to the Boards for
approval.




39




(4) Our
Company did not formulate a Related Party Transactions Policy and develop a
master list of all Related Parties.





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.





Management’s
Plan for Remediation of Material Weaknesses


In light
of the conclusion that our Company’s internal control over financial reporting
was not effective, our management has worked, and will continue to work, to
address these weaknesses in our internal control over financial reporting.
Implementations of certain remedial measures include the following:





(1) We
are going to issue the Code, and arrange respective training to all the
employees before April 30, 2009. Training which includes the content of the Code
will be provided to new employees at the time of hiring. All the employees will
be required to sign an affidavit acknowledging that the employee has read and
will intend to comply with the Code;





(2) The
management is committed to develop a comprehensive and risk-based internal audit
function within the Company. With the limited human capital supplies in the
market, we have engaged a third party professional to assist the management in
establishing the internal control system. At the same time, we have enhanced our
efforts of recruitment and interviews are undergoing. We expect that an internal
audit department will be set up before May 31, 2008. With the continuous
assistance from the third party professional, the roles and responsibilities of
the internal audit department will be formulated and a risk-based internal audit
plan will be developed and approved by the Audit Committee within a month after
the set up.





(3) The
Board of Directors has appointed Mr. Zhang Xin Min on March 10, 2008, Mr. Zhang
serves as a financial expert of Audit Committee and will provide
oversight/monitoring over our financial reporting mechanism.





(4).
Compensation Committee Charter, Audit Committee Charter and Related Party
Transactions Policy have been drafted and will be approved by the Board of
Directors and become effective before second quarter of 2009.




Changes
in Internal Control over Financial Reporting




During
the year ended December 31, 2007, there was no change in our internal controls
over financial reporting that has materially affected, or that is reasonably
likely to materially affect, our internal control over financial
reporting.




Item 9B. Other Information





None.




40




Part
III




Item 10. Directors, Executive Officers,
Promoters, Control Persons and Corporate Governance; Compliance with Section
16(a) of the Exchange Act




Directors
and Executive Officers




Directors
      and Executive
                      Officers
                    
                    Position/Title
                    
                    AgeYuchuan
      LIU
                    
                    President
      & Chief Executive Officer, director and Chairman of the
      Board
                    
                    44Zhicheng
      ZHOU
                    
                    Chief
      Operating Officer/Director (since Mar. 14, 08)
                    
                    44Zhimin
      ZHONG
                    
                    Marketing
      Director
                    
                    53Shukui
      BIAN
                    
                    Vice
      President & Chief Engineer
                    
                    44Yong
      ZHANG
                    
                    Chief
      Financial Officer (resigned August 25, 2008)
                    
                    34Yugang
      ZHANG
                    
                    Chief
      Financial Officer (effective August 25, 2008)
                    
                    37Guowei
      CHEN
                    
                    Director
                    
                    52Quandong
      SUN
                    
                    Director
                    
                    42Xinmin
      ZHANG
                    
                    Director
                    
                    53John
      D. KUHNS
                    
                    Director
      (resigned effective Mar. 8, 08)
                    
                    57Fang
      CHEN
                    
                    Director
      (resigned effective Mar. 6, 08)
                    
                    35




here are
no family relationships among our directors or executive officers.





All our
directors hold office until the next annual meeting of our shareholders, and
until their successors have been qualified after being elected or appointed.
Officers serve at the discretion of our board of directors.





Set forth
below is the biographical information about our directors and executive
officers:




Mr. Yuchuan
Liu Mr. Liu was appointed our Chairman, Chief Executive Officer and
President on September 7, 2006. Mr. Liu graduated from North Industrial
University, Beijing, PRC with a B.S. degree in electrical engineering. Mr. Liu
has been a licensed Senior Engineer in the PRC since 1997. Mr. Liu was the
Chairman of the board of directors and General Manager of Beijing Zhong Ran Wei
Ye Gas Co., Ltd. between 2003-2006 and he was the Chairman of the Board of
Beijing Xiang Ke Jia Hua Petroleum and Natural Gas Co., Ltd. between 2000 and
2003. Prior to that, Mr. Liu served as CEO of Lang Fang Zhong Gong Petroleum and
Natural Gas Technology Co., Ltd. from 1997 to 1999. Prior to that, Mr. Liu
served as the Chief of Research and Development Department of Petro China from
1983 to 1997.




Mr.
Zhicheng Zhou Mr. Zhou was appointed our Chief Operating Officer on
October 19, 2006. Previously, Mr. Zhou served as the director and General
Manager of Beijing Chenguang Gas Co., Ltd. from late 2002 to 2007. Prior to
that, Mr. Zhou served as the Associate General Manager and later General Manager
of Beijing Zhong Ran Xiang Ke Petroleum and Oil Technology Co., Ltd. between
2001 and 2002.





Mr. Zhimin
ZhongMr.
Zhong was appointed our Marketing Director on September 7, 2006.Mr. Zhong graduated
from Nanjing University with a B.S. in Philosophy. Mr. Zhong was the Marketing
Director for Beijing Zhong Ran Wei Ye Gas Co., Ltd., between 2004-2006. Mr.
Zhong was Vice President of Shen Zhen Guo Qi Real Estate Co. Ltd from 1995 to
2004. Prior to that, Mr. Zhong served as a government official in several cities
in Jiang Xi Province between 1978 and 1995.




Mr. Shukui
BianMr.
Bian was appointed our Vice President and Chief Engineer on September 7, 2006.
Mr. Bian graduated from Daqing Petroleum Institute with a B.S. and Petroleum
University with a M.S. He served as Vice President of Beijing Zhong Ran Xiang Ke
Petroleum and Oil Technology Co., Ltd. between 2000 and 2007. Prior to that, Mr.
Bian had been with North China Oilfield The First Refinery Factory for fourteen
years. Mr. Bian was one of the industry experts that drafted The National
Standard of Natural Gas Usage in Cities in China.




Mr. Yugang ZhangOn August 25, 2008, Mr. Yugang Zhang was appointed Chief Financial
Officer. Mr. Zhang was the Area Financial Controller for Asian Operation of
Smufit-Stone Container Enterprises Inc., a U.S. company, from June 2003 to July
2008. Prior to that, from March 2001 to May 2003, he worked as the Plant
Controller of the same company in Mansfield, MA. From September 2000 to March
2001, he was the Assistant Controller and Accounting Manager for FAE Worldwide,
Inc. in Boston, MA. From February 1999 to September 2000, he was the Staff
Accountant for Braver CPAs & Co., P.C. of Chestnut Hill, MA. Mr. Zhang
obtained an MBA from the Clark University of Massachusetts with a full-tuition
scholarship in 1997 and graduated from the Mechanical Engineering School of
Harbin Institute of Technology in Harbin with a Bachelor’s degree in
1993.




41




Mr.
GuoweiChenMr. Chen was appointed
our director on September 7, 2006 and a member of the auditor committee of our
board and a member of the compensation committee of our board on October 19,
2006. Mr. Chen graduated from East China College of Metallurgy with a major in
Accounting. From March 2006 to present, Mr. Chen has been the general manager
and chairman of the board of Shen Zhen Jia Xin Real Estate Development Co., Ltd.
Prior to that, he was the general manager of Hang Zhou Steal Group from 2001 to
February 2006. Mr. Chen is very experienced in general and financial
management.





Mr.
QuandongSunMr. Sun was appointed
our director on September 7, 2006 and a member of the auditor committee of our
board and a member of the compensation committee of our board on October 19,
2006. Mr. Sun graduated from Shanghai Maritime University with a B.S. Mr. Sun
has been Chairman of Jidong Shipping Co., Ltd from 1995. Prior to that, Mr. Sun
served as Manager in the Shipping Department of Shekou Shipping Co., Ltd between
1987 to 1994.





Mr. Xinmin
Zhang Mr. Zhang was appointed our director on March 10, 2008. From
December 1999 to present, Mr. Zhang is the Dean of International Business
School, University of International Business and Economics (“UIBE”) in Beijing,
China. From September 1994 to December 1999, he was the Vice Dean of
International Business School, UIBE. He is a Certified Public Accountant and
also a professor of Accounting of UIBE. Mr. Zhang now serves as the independent
director of three listed companies in China which are Minmetals Development Co.,
Ltd, Gree Corporation, Guangcai Construction Co., Ltd. Mr. Zhang obtained his
Bachelor of Engineering from Northern Industrial University in 1983, his Master
of Economics from Renmin University in 1989 and his Ph.D. in Management Science
from Northeastern University of Economics and Trade in 2001.





To our
knowledge, during the last five years, none of our directors and executive
officers (including those of our subsidiaries) has:




Had a
bankruptcy petition filed by or against any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or
within two years prior to that time.




Been
convicted in a criminal proceeding or been subject to a pending criminal
proceeding, excluding traffic violations and other minor offenses.





Been
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities.





Been
found by a court of competent jurisdiction (in a civil action), the SEC, or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.





In 2007,
the Board of Directors had held three meetings, all the directors were present,
except John Kuhns missed all three meetings. For each individual committee, no
meeting was held.




Board
Composition and Committees





Our board
of directors currently consists of five members: Yuchuan Liu, Xinmin Zhang,
Guowei Chen, Quandong Sun and Zhicheng Zhou. Xinmin Zhang and Guowei Chen are
“independent” as that term is defined by SEC rules.





42





Compensation
Committee





Our
Compensation Committee comprises three members and is responsible for the
administration of all salary, bonus and incentive compensation plans for our
officers and key employees. The members of our Compensation Committee are Xinmin
Zhang, Guowei Chen and Quandong Sun. Xinmin Zhang and Guowei Chen are
“independent” as that term is defined by SEC rules.




Audit
Committee Financial Expert





Because
we only recently consummated the reverse merger transaction and appointed the
current members of our board of directors, our board of directors has not yet
appointed a member who qualifies as an "audit committee financial expert" as
defined in Item 401(e) of Regulation S-B, and is "independent" as the term is
used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.





Audit
Committee




Our board
of directors appointed an audit committee on October 19, 2006. Our audit
committee members are Sun Quan Dong, Chen Guo Wei and Xinmin Zhang. Xinmin Zhang
and Guowei Chen are “independent” as that term is defined by SEC rules. At the
present time, we believe that the members of our audit committee are
collectively capable of analyzing and evaluating our financial statements and
understanding internal controls and procedures for financial reporting. Our
company, however, recognizes the importance of good corporate governance and
intends to identify and appoint an audit committee comprised entirely of
independent directors, including at least one financial expert, in the near
future.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires our executive officers, directors and
beneficial owners of more than ten percent (10%) to report their beneficial
ownership of equity interests in the company to the SEC. Their initial reports
are required to be filed using the SEC's Form 3, and they are required to report
subsequent purchases, sales, and other changes using the SEC's Form 4, which
must be filed within two business days of most transactions. Officers,
directors, and persons owning more than 10% of our capital shares are required
by SEC regulations to furnish us with copies of all of reports they file
pursuant to Section 16(a).




According
to our records, Guowei Chen and Zhicheng Zhou and Vision Opportunity Master Fund
Ltd did not file their form 3 in a timely manner.





Code
of Ethics





We
currently do not have a Code of Ethics and the Board intends to adopt one in the
near future.





Item 11. Executive
Compensation





We had no
officers or directors whose total annual salary and bonus in 2007 and 2006
exceeded $100,000 with the exception of Mr. Yuchuan Liu. Mr. Yuchuan Liu was
appointed chairman of the board, president and chief executive officer on
September 7, 2006. The compensation amounts paid to Mr. Liu and Mr. Li reflect
compensation paid to them by the operating subsidiaries of Sino Gas and its
subsidiaries during the reported periods.





43





Summary
Compensation Table




Name
      and Principal
                                Underlying
                                Positions
                              
                              Year
                              
                              Salary
                              
                              
                              Bonus
                              
                              
                              Option
                                Awards
                              
                              
                              Stock
                                Awards
                              
                              
                              All Other
                                Compensation
                              
                              
                              TotalYuchuan
      Liu- President & CEO
                              
                              2007
                              
                              $
                              100,000
                              
                              
                              
                              **50,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              150,0002006
                              
                              $
                              22,800
                              
                              
                              $
                              1,913
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              $
                              24,713Vincent
      Hu CFO (since 11/07)
                              
                              2007
                              
                              $
                              10,000
                              
                              
                              $
                              —
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              —
                              
                              
                              $
                              10,000Fang
      Chen CFO (until 11/07)
                              
                              2007
                              
                              $
                              55,000
                              
                              
                              $
                              **30,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              —
                              
                              
                              $
                              85,0002006
                              
                              $
                              11,691
                              
                              
                              $
                              —
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              —
                              
                              
                              $
                              11,691Zhicheng
      Zhou-Chief Operating Officer
                              
                              2007
                              
                              $
                              60,000
                              
                              
                              
                              **30,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              90,000Shuwang
      Li *
                              
                              2006
                              
                              $
                              11691
                              
                              
                              $
                              1,913
                              
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              
                              —
                              
                              
                              $
                              13604




* Mr.
Shuwang Li, the Chief Operating Officer, resigned from the post in Oct 2006 and
only worked for the Company from January to September of 2006. Zhicheng Zhou
replaced him as our Chief Operating Officer in October 2006.





** The
bonuses have not been paid and are estimates only subject the approval of the
board of directors.




Our
Compensation Committee comprises three members and is responsible for the
administration of all salary, bonus and incentive compensation plans for our
officers and key employees. The members of our Compensation Committee are Xinmin
Zhang, Chen Guo Wei and Quandong Sun.





Outstanding
Equity Awards





Mr.
Shuwang Li, the ex-Chief Operating Officer, was awarded 393,581 common shares in
October 2006.




Equity
Compensation Plan





The board
of directors of the Company adopted a stock option plan on November 19, 2007 and
reserved 1,460,000 shares of our common stock as options to be issued under the
plan.





Retirement,
Post-Termination and Change in Control Description





The
Company currently does not have retirement, post-termination and change in
control arrangements for its officers.




Compensation
of Directors




Directors
and employees are not currently additionally compensated for their services as a
director.  Our director compensation consists of cash only. Each director
is paid an annual retainer of $5,000. An additional $5,000 is paid to one
director who is also the chairman of the Audit Committee which is vacant now.
All our directors hold office until the next annual meeting of our shareholders,
and until their successors have been qualified after being elected or
appointed.




Name
                              
                              Fees Earned
                                or Paid in
                                Cash
                                ($)
                              
                              Stock Awards
                                ($)
                              
                              Option
                                Awards ($)
                              
                              Non-Equity
                                Incentive
                                Plan
                                Compensation
                                ($)
                              
                              Non-Qualified
                                Deferred
                                Compensation
                                Earnings
                                ($)
                              
                              All
                                Other
                                Compensation
                                ($)
                              
                              Total ($)Yuchuan Liu
                              
                              
                              0
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              0Zhicheng
      Zhou
                              
                              
                              0
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              0Guowei
      Chen
                              
                              
                              5,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              5,000Quandong
      Sun
                              
                              
                              5,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              5,000Xinmin
      Zhang
                              
                              
                              5,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              5,000




Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters





The
following table sets forth, as of March 31, 2008, certain information with
respect to the beneficial ownership of our equity securities, by (i) any person
or group with more than 5% of any class of our voting securities, (ii) each
director, (iii) our chief executive officer and each other executive officer and
(iv) all executive officers and directors as a group. The table reflects the
ownership of our equity securities by the foregoing parties after the
304.44-for-1 reverse stock-split of our common stock.





As of the
date of this report, we have outstanding (i) 24,877,271 shares of common stock,
(ii) no shares of series A convertible preferred stock, (iii) 4,971,859
shares of series B convertible preferred stock and 95,418 shares of series B-1
preferred stock, (iv) series A warrants to purchase an aggregate of 241,708
shares of common stock at $3.84 per share, (v) series C warrants to purchase an
aggregate of 3,083,588 shares of common stock at $3.375 per share, (vi) series G
warrants to purchase an aggregate of 109,489 shares of common stock at $3.84 per
share, (vii) series F warrants to purchase an aggregate of 271,074 shares of
common stock and (viii) placement agent warrant to purchase an aggregate of
271,074 shares of common stock. The warrants are exercisable until September
2012. The placement agent warrant is exercisable until September 2010. The
warrants have cashless exercise provision entitling the holders to obtain shares
equal to the product of (1) the nominator is the difference between the market
value of all the exercised shares on the date of exercise and the exercise price
of all the exercised shares and (2) the denominator is the market price per
share on the date of exercise.





44




Shares of
Series B convertible preferred stock vote together with shares of common stock
on all matters upon which stockholders are entitled to vote. On those matters
upon which the series B convertible preferred stock votes together with the
common stock as a single class, each share of series B convertible preferred
stock carries a number of votes equal to the number of shares of common stock
that would be issuable upon conversion. Each holder of series B convertible
preferred stock shall be entitled to notice of any stockholders’ meeting in
accordance with our bylaws. Series B-1 preferred stock have the same rights and
privileges as series B preferred stock.




In
determining beneficial ownership of the common stock, the number of shares shown
includes shares which the beneficial owner may acquire upon exercise of warrants
or options which may be acquired within 60 days. In determining the percent of
common stock owned by a person on March 31, 2008, (a) the numerator is the
number of shares of the class beneficially owned by such person, including
shares which the beneficial ownership may acquire within 60 days upon conversion
of the series B convertible preferred stock or exercise of the warrants and
option, and (b) the denominator is the sum of (i) the total shares of that class
outstanding on March 31, 2008, and (ii) the total number of shares that the
beneficial owner has acquired or may acquire upon conversion of the
series B convertible preferred stock or exercise of the warrants and option.
Unless otherwise stated, each beneficial owner has sole power to vote and
dispose of the shares.





Except as
otherwise stated, the address of the directors and executive officers listed in
the table is:





c/o
Beijing Zhong Ran Wei Ye Gas Co., Ltd.


N0.18
Zhong Guan Cun Dong St.


Haidian
District


Beijing,
China 10083




Amount and Nature of
                                  Beneficial
                                  Ownership
                                
                                
                                Percent of ClassShareholder
                                
                                Series
                                  B Preferred
                                  Stock(1)
                                
                                
                                Common
                                  Stock(2)
                                
                                
                                Series
                                  B Preferred Stock
                                
                                
                                Common StockOwner of More than 5% of ClassEloten
      Group Ltd.
                                
                                
                                
                                
                                
                                6,524,174
                                (5)(6)
                                
                                
                                
                                
                                
                                26.2
                                %Leading
      King Investment Limited
                                
                                
                                
                                
                                
                                5,384,923
                                (7)(8)
                                
                                
                                
                                
                                
                                21.6
                                %Vision
      Opportunity Master Fund, Ltd.
                                
                                
                                4,475,831
                                
                                
                                
                                2,756,824
                                
                                
                                
                                88.3
                                %
                                
                                
                                11.1
                                %T.
      Rowe Price Small-Cap Value Fund, Inc.
                                
                                
                                
                                
                                
                                
                                2,444,444
                                
                                
                                
                                
                                
                                
                                
                                9.8
                                %Directors and Executive
      OfficersLiu
      Yuchuan
                                
                                
                                
                                
                                
                                
                                6,524,174
                                (5)(6)
                                
                                
                                
                                
                                
                                
                                26.2
                                %Sun
      Quandong
                                
                                
                                
                                
                                
                                
                                5,384,923
                                (7)(8)
                                
                                
                                
                                
                                
                                
                                21.6
                                %Zhong
      Zhimin
                                
                                
                                
                                
                                
                                
                                393,81
                                (3)
                                
                                
                                
                                
                                
                                
                                0.16
                                %Zhou
      Zhicheng
                                
                                
                                
                                
                                
                                
                                -Bian
      Shukui
                                
                                
                                
                                
                                
                                
                                173,962
                                (3)
                                
                                
                                
                                
                                
                                
                                0.7
                                %Chen
      Fang
                                
                                
                                
                                
                                
                                
                                65,604
                                (3)
                                
                                
                                
                                
                                
                                
                                0.26
                                %Chen
      Guowei
                                
                                
                                
                                
                                
                                
                                -
                                (3)
                                
                                
                                
                                
                                
                                
                                -John
      Kuhns
                                
                                
                                
                                
                                
                                
                                635,822
                                (4)
                                
                                
                                
                                
                                
                                
                                2.56
                                %All Directors and Executive
      Officers
                                
                                
                                
                                
                                
                                
                                12,823,866
                                %
                                
                                
                                
                                
                                
                                
                                51.5
                                %




45




(1) The
Series B convertible preferred stock and the warrants are assumed to be
non-convertible and non-exercisable within 60 days of their date of issuance.
There are conversion restrictions placed on series B preferred stock and
warrants to avoid the series B preferred stock holders and warrant holders
owning more than 9.9% of total common stock for each individual series B
preferred stock holder or warrant holder. Series B preferred stock holder can
waive the restriction upon 61 days notice to the Company. Warrant holders cannot
waive such restriction.





(2) Only
shares of common stock are listed because of restrictions imposed on series B
and B-1 preferred shares and warrants as stated in (1) above.





(3)
Shares of common stock issued to Gas (BVI) as a result of the consummation of
the share exchange agreement are beneficially attributed to each of the Gas
(BVI) shareholders based on each shareholder's percentage ownership interest in
Gas (BVI) immediately prior to execution of the share exchange
agreement.




(4)
Includes common shares issued upon the conversion, on February 23, 2007, of (i)
113,847 shares of series B convertible preferred stock issued to Kuhns Brothers,
Inc., which are beneficially attributed to John Kuhns, and (ii) 56,925 shares of
series B convertible preferred stock issued to John Kuhns.





(5)
Includes 6,524,174 common shares issued upon conversion of series A convertible
preferred stock to Eloten Group Ltd., which are beneficially attributed to Mr.
Liu Yu Chuan. Mr. Liu and his wife hold an aggregate of 100% ownership interest
in Eloten Group Ltd.





(6)
Includes 108,286 shares of common stock beneficially attributed to Eloten Group
Ltd. based on Eloten Group Ltd.'s ownership interest in Gas (BVI).





(7)
Includes 5,384,923 common shares issued upon conversion of series A convertible
preferred stock to Leading King Investment Limited, which are beneficially
attributed to Mr. Sun Quan Dong. Mr. Sun holds 50% ownership interest in Leading
King Investment Limited.





(8)
Includes 89,377 shares of common stock beneficially attributed to Leading King
Investment Limited based on Leading King Investment Limited's ownership interest
in Gas (BVI). Mr. Sun holds a 50% ownership interest in Leading King Investment
Limited.




Item 13. Certain Relationships and Related
Transactions





On
January 15, 2007, Beijing Gas acquired 100% equity interest of Beijing Chenguang
Gas Ltd., Co. for a purchase price of 26,000,000 RMB (or approximately USD3.35
million) in cash. Beijing Chenguang became a wholly-owned subsidiary of Beijing
Gas. Beijing Chenguang is primarily engaged in the business of developing,
transfer and licensing of technologies regarding natural gas purification,
compression and transportation., as well as installation of natural gas
equipment and supply of natural gas. Mr. Zhicheng Zhou, our Chief Operating
Officer, owned 30% of Beijng Chenguang immediately prior to the
acquisition.





46




Item 14. Principal Accountant Fees and
Services




Aggregate
fees billed by the Company's current principal accountants, Samuel H.
Wong & Co., LLP, for audit services related to the most recent fiscal
year, and for other professional services billed in the most recent fiscal
year, were as follows:





FISCAL 2007
                  
                  
                  FISCAL 2006Audit
      Fees (1)
                  
                  $
                  100,000
                  
                  
                  
                  100,000Audit-Related
      Fees
                  
                  
                  —
                  
                  
                  
                  —Tax
      Fees (2)
                  
                  
                  —
                  
                  
                  
                  —All
      Other Fees
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  100,000
                  
                  
                  
                  100,000





(1)
            Comprised of the audit of the
      Company's  annual  financial  statements  and 
      reviews of the Company's quarterly  financial 
      statements,  as well as consents related to and reviews of other
      documents filed with the Securities and Exchange
      Commission.




(2)
            Comprised  of 
      preparation  of all federal and state corporate income tax
      returns for the Company and its
  subsidiaries.




ITEM 15. EXHIBITS




Exhibit
                  Number3.1
                
                Articles
      of Incorporation, as amended on November 14, 2006 incorporated by
      reference from 10-Q filed on August 20, 2007.3.2*
                
                Bylaws.3.3*
                
                Certificate
      of Designations authorizing the Series A Convertible Preferred
      Stock.3.4*
                
                Amended
      and Restated Certificate of Designations authorizing the Series B
      Convertible Preferred Stock.4.1**
                
                Series
      B Stock Purchase Agreement, dated as of September 7, 2006, by and among,
      Dolce Ventures, Inc., Vision Opportunity Master Fund, Ltd. and each of the
      other investors party thereto.4.2**
                
                Registration
      Rights Agreement, dated as of September 7, 2006, by and between, Dolce
      Ventures, Inc., Vision Opportunity Master Fund, Ltd.4.3**
                
                Lock-Up
      Agreement, dated as of September 7, 2006, by and among, Dolce Ventures,
      Inc., Leading King Investment Limited, Eloten Group, Ltd., Cheng Fang and
      certain other parties named therein.4.4*
                
                Form
      of Series A Warrant.4.5*
                
                Form
      of Series B Warrant.4.6*
                
                Form
      of Series C Warrant.4.7*
                
                Form
      of Series D Warrant.4.8*
                
                Form
      of Series J Warrant.4.9**
                
                Share
      Exchange Agreement dated as of September 7, 2006, by and between, Dolce
      Ventures, Inc., Yu-chuan Liu, and each of the other parties named
      therein.4.10**
                
                Stock
      Purchase Agreement dated as of August 24, 2006, by and between, Gas
      Investment China Co., Ltd. and each of the other parties named
      therein.4.11**
                
                Consulting
      Agreement dated August 8, 2006, by and between Kuhns Brothers, Inc. and
      Dolce Ventures, Inc.4.12**
                
                Engagement
      Letter dated Feb 15, 2006, by and between, Beijing Zhong Ran Wei Ye Gas
      Co., Ltd. and Kuhns Brothers, Inc.4.13**
                
                Escrow
      Agreement dated September 7, 2006, by and between, Gas Investment China
      Co., Ltd., Vision Opportunity Master Fund, Ltd. and Kramer Levin Naftalis
      & Frankel LLP.





47




4.14****
                
                Securities
      Purchase Agreement dated as of September 7, 2007 by and among the Company
      and the investors named therein.4.15****
                
                Registration
      Rights Agreement dated as of September 7, 2007 by and among the Company
      and the investors named therein.4.16****
                
                Make
      Good Escrow Agreement dated as of September 7, 2007 by and between the
      Company, the investors and Manufacturers and Traders Trust Company, as
      escrow agent.4.17***
                
                Series
      B Stock Purchase Agreement, dated as of October 20, 2006, by and among,
      Dolce Ventures, Inc., and each of the other investors named
      therein.4.18***
                
                Registration
      Rights Agreement, dated as of October 20, 2006, by and between, Dolce
      Ventures, Inc., and each of the other investors named
    therein.4.19***
                
                Form
      of Lock-Up Agreement, by and among, Docle Ventures, Inc., and certain
      other parties named therein.10.1
                
                Urban
      Gas Development Agreement with Jinzhou Town incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.2
                
                Municipal
      Public Utilities Franchise Agreement with Yutian County incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-14799810.3
                
                Urban
      Gas Development Agreement with Yutian County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.4
                
                Urban
      Gas Development Agreement with Wuqiao County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.5
                
                The
      Agreement on Developing the Pipeline Gas Project with Xintang County
      incorporated by reference from SB-2 filed on January 11, 2008, file number
      333-14799810.6
                
                Urban
      Gas Development Agreement with Linzhang County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.7
                
                Urban
      Gas Development Agreement with Ningjin County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.8
                
                Urban
      Gas Development Agreement with Luquan County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.9
                
                Gas
      Supply Contract- Henan Zhongyuan Lvneng High-Tech Co., Ltd incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-14799810.10
                
                Gas
      Supply Contract-PetroChina Huabei Oilfield Company incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-147998





48





10.11
              
              Gas
      Supply Contract-Tianjin Dagang Oilfield Transportation Co., Ltd
      incorporated by reference from SB-2 filed on January 11, 2008, file number
      333-14799810.12
              
              Gas
      Supply Contract-Hebei Natural Gas Co., Ltd incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.13
              
              Gas
      Supply Contract-Xinjiang Guanghui LNG Development Co., Ltd incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-14799810.14
              
              Pipe
      Gas Franchise Agreement for Baishan City incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.15
              
              Pipe
      Gas Franchise Agreement for Si County incorporated by reference from SB-2
      filed on January 11, 2008, file number 333-14799810.16
              
              Pipe
      Gas Franchise Agreement for Xiahuayuan District incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.17
              
              Pipe
      Gas Franchise Agreement for Yu County incorporated by reference from SB-2
      filed on January 11, 2008, file number 333-14799810.18
              
              Pipe
      Gas Franchise Agreement for Wuhe County incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.19
              
              Pipe
      Gas Franchise Agreement for Zaoqiang County incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.20
              
              The
      Cooperation Agreement on Gas Project in Xinji Town incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-14799810.21
              
              The
      Cooperation Agreement with Chengan County incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.22
              
              Urban
      Gas Development Agreement with Nangong Town incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.23
              
              Pipe
      Gas Franchise Agreement for Pei County incorporated by reference from SB-2
      filed on January 11, 2008, file number 333-14799810.24
              
              Urban
      Gas Development Agreement with Gucheng County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.25
              
              Urban
      Pipe Natural Gas Project Development Agreement with Sihong County
      incorporated by reference from SB-2 filed on January 11, 2008, file number
      333-14799810.26
              
              Urban
      Gas Development Agreement with Changli County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.27
              
              Urban
      Gas Development Agreement with Shenzhou Town incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.28
              
              Urban
      Gas Development Agreement with Longyao County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-147998





49





16.1*
              
              Letter
      dated September 7, 2006 from Dolce Ventures, Inc. to Robison, Hill &
      Co.16.2*
              
              Letter
      dated September 12, 2006 from Robison, Hill & Co. to the
      SEC.21.1
              
              List
      of Subsidiaries incorporated by reference from SB-2 filed on January 11,
      2008, file number 333-14799831.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.*
              
              Incorporated
      by reference from Form 8-K filed September 7,
2006.**
              
              Incorporated
      by reference from Form 8-K/A filed on November 28,
2007.***
              
              Incorporated
      by reference from Form 8-K/A filed on November 27,
2007.****
              
              Incorporated
      by reference from Form 8-K filed September 13,
  2007.




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.




SINO GAS INTERNATIONAL HOLDINGS, INC.Date:
      March 24, 2009
                By:
                /s/
      Liu Yu ChuanLiu
      Yu ChuanChairman of the Board, Director,
                  President and Chief Executive Officer




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.




Signatures
                                
                                Title
                                
                                Date/s/
      Yuchuan Liu
                                
                                Chief
      Executive Officer and Director
                                
                                March
      24, 2009Yuchuan
      Liu
                                
                                (Principal
      Executive Officer)/s/
      Yugang Zhang
                                
                                Chief
      Financial Officer
                                
                                March
      24, 2009Yugang
      Zhang/s/
      Guowei Chen
                                
                                Director
                                
                                March
      24, 2009Guowei
      Chen/s/
      Quandong Sun
                                
                                Director
                                
                                March
      24, 2009Quandong
      Sun/s/
      Xinmin Zhang
                                
                                Director
                                
                                March
      24, 2009Xinmin
      Zhang/s/
      Zhicheng Zhou
                                
                                Director
      and Chief Operating Officer
                                
                                March
      24, 2009Zhicheng
      Zhou





50





SINO
GAS INTERNATIONAL HOLDINGS, INC.


INDEX
TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2007, AND
2006




51







SINO
GAS INTERNAIONAL HOLDINGS, INC





CONSOLIDATED
AUDITED FINANCIAL STATEMENTS





DECEMBER
31, 2007 AND 2006





(Stated
in US dollars)










Sino Gas International
Holdings Inc.





CONTENTS
                        
                        PAGESREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                        
                        F-1CONSOLIDATED
      BALANCE SHEETS
                        
                        F-2-F-3CONSOLIDATED
      STATEMENTS OF INCOME
                        
                        F-4CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                        
                        F-5-F-7CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                        
                        F-8NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                        
                        F-9-F-48










To:
            The
      Board of Directors and Stockholders of
              Sino Gas International Holdings,
Inc.




Report of Independent
Registered Public Accounting Firm





We have
audited the accompanying consolidated balance sheets of Sino Gas International
Holdings, Inc. as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended.  These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Sino Gas International Holdings,
Inc as of December 31, 2007 and 2006, and the results of its operations and its
cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.




South
      San Francisco, California
              
              Samuel
      H. Wong & Co., LLPMarch
      25, 2008
              
              Certified
      Public Accountants




F-1


SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
BALANCE SHEETS


AS
OF DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





2007
                                            
                                            
                                            2006ASSETSCurrent
      Assets
                                            
                                            NotesCash
      & cash equivalents
                                            
                                            
                                            2(e)
                                            
                                            
                                            $
                                            10,915,590
                                            
                                            
                                            $
                                            3,638,673Restricted
      cash
                                            
                                            
                                            3
                                            
                                            
                                            
                                            478,920
                                            
                                            
                                            
                                            3,124,541Notes
      receivable
                                            
                                            
                                            
                                            
                                            
                                            
                                            825,119
                                            
                                            
                                            
                                            477,390Accounts
      receivable
                                            
                                            
                                            2(f),4
                                            
                                            
                                            
                                            7,315,253
                                            
                                            
                                            
                                            6,534,740Advance
      to suppliers
                                            
                                            
                                            2(g)
                                            
                                            
                                            
                                            27,372
                                            
                                            
                                            
                                            68,309Other
      receivables
                                            
                                            
                                            2(f)
                                            
                                            
                                            
                                            3,100,695
                                            
                                            
                                            
                                            1,263,800Inventory
                                            
                                            
                                            
                                            
                                            
                                            
                                            207,976
                                            
                                            
                                            
                                            -Prepayment
      and others
                                            
                                            
                                            
                                            
                                            
                                            
                                            320,380
                                            
                                            
                                            
                                            141,878Total
      Current Assets
                                            
                                            
                                            
                                            
                                            
                                            
                                            23,191,305
                                            
                                            
                                            
                                            15,249,331Non-Current
      AssetsInvestment
                                            
                                            
                                            2(h),5
                                            
                                            
                                            
                                            4,007,310
                                            
                                            
                                            
                                            2,939,029Property, plant
      & equipment, net
                                            
                                            
                                            2(j),6
                                            
                                            
                                            
                                            24,572,565
                                            
                                            
                                            
                                            10,608,530Construction
      in progress
                                            
                                            
                                            2(l)
                                            
                                            
                                            
                                            11,556,820
                                            
                                            
                                            
                                            4,628,076Intangible assets,
      net
                                            
                                            
                                            2(k),7
                                            
                                            
                                            
                                            2,028,250
                                            
                                            
                                            
                                            457,830Total
      Non-current Assets
                                            
                                            
                                            
                                            
                                            
                                            
                                            42,164,945
                                            
                                            
                                            
                                            18,633,465Total
      Assets
                                            
                                            
                                            
                                            
                                            
                                            $
                                            65,356,250
                                            
                                            
                                            $
                                            33,882,796LIABILITIES
      & STOCKHOLDERS' EQUITYLIABILITIESCurrent
      LiabilitiesBank
      loans
                                            
                                            
                                            8
                                            
                                            
                                            $
                                            2,734,444
                                            
                                            
                                            $
                                            2,430,445Accounts
      payable
                                            
                                            
                                            
                                            
                                            
                                            
                                            716,707
                                            
                                            
                                            
                                            3,891,388Other
      payables
                                            
                                            
                                            9
                                            
                                            
                                            
                                            10,383,657
                                            
                                            
                                            
                                            1,790,500Accrued
      liabilities
                                            
                                            
                                            
                                            
                                            
                                            
                                            362,262
                                            
                                            
                                            
                                            418,390Unearned
      revenue
                                            
                                            
                                            2(m)
                                            
                                            
                                            
                                            312,573
                                            
                                            
                                            
                                            37,760Total
      Current Liabilities
                                            
                                            
                                            
                                            
                                            
                                            
                                            14,509,644
                                            
                                            
                                            
                                            8,568,483Total
      Liabilities
                                            
                                            
                                            
                                            
                                            
                                            $
                                            14,509,644
                                            
                                            
                                            $
                                            8,568,483





See
Accompanying Notes to Financial Statements and Accountant’s
Report


F-2





SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
BALANCE SHEETS


AS
OF DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





NotesSTOCKHOLDERS'
      EQUITYPreferred
      Stock B US$0.001 par value; 5,000,000 shares authorized; 4,971,859 and
      4,023,268 shares issued and outstanding as of December 31, 2007 and 2006
      respectively
                            
                            
                            10
                            
                            
                            $
                            4,972
                            
                            
                            $
                            4,023Additional
      paid in capital - Preferred Stock B
                            
                            
                            
                            
                            
                            
                            5,323,972
                            
                            
                            
                            3,817,049Additional
      paid in capital - Warrants Series: A, B, J, C, D
                            
                            
                            
                            
                            
                            
                            311,110
                            
                            
                            
                            3,439,764Preferred
      Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 and 0
      shares issued and outstanding as of December 31, 2007 and 2006
      respectively
                            
                            
                            10
                            
                            
                            
                            95
                            
                            
                            
                            -Additional
      paid in capital - Preferred Stock B-1
                            
                            
                            
                            
                            
                            
                            132,662
                            
                            
                            
                            -Additional
      paid in capital - Beneficial Conversion Feature
                            
                            
                            
                            
                            
                            
                            7,002,292
                            
                            
                            
                            6,418,864Common
      Stock US$0.001 par value; 250,000,000 shares authorized; 24,877,271 and
      14,693,186 shares issued and outstanding as of December 31, 2007 and 2006
      respectively.
                            
                            
                            10
                            
                            
                            
                            24,877
                            
                            
                            
                            14,693Additional
      paid in capital - Common Stock
                            
                            
                            
                            
                            
                            
                            23,196,304
                            
                            
                            
                            4,812,363Additional
      paid in capital - Warrants Series: E, G
                            
                            
                            
                            
                            
                            
                            47,946
                            
                            
                            
                            -Additional
      paid in capital - Warrants Series: F, R
                            
                            
                            
                            
                            
                            
                            107,652
                            
                            
                            
                            -Statutory
      reserve
                            
                            
                            2(v)
                            
                            
                            
                            3,258,201
                            
                            
                            
                            2,025,022Retained
      earnings
                            
                            
                            
                            
                            
                            
                            9,167,930
                            
                            
                            
                            3,958,239Accumulated
      other comprehensive income
                            
                            
                            2(x)
                            
                            
                            
                            2,268,593
                            
                            
                            
                            824,296Total
      Stockholders' Equity
                            
                            
                            
                            
                            
                            
                            50,846,606
                            
                            
                            
                            25,314,313Total
      Liabilities & Stockholders' Equity
                            
                            
                            
                            
                            
                            $
                            65,356,250
                            
                            
                            $
                            33,882,796





See
Accompanying Notes to Financial Statements and Accountant’s
Report


F-3





SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF INCOME


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Notes
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2006RevenueNet
      revenues
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      20,267,756
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      10,870,718Cost
      of revenues
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (9,499,752
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (4,389,142
                                                      )Gross
      Profit
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      10,768,004
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      6,481,576Operating ExpenseSelling
      and marketing expenses
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (608,830
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (95,779
                                                      )General
      and administrative expenses
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,106,389
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1,155,849
                                                      )Total
      operating expense
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (2,715,219
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1,251,628
                                                      )Operating
      Income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      8,052,785
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      5,229,948Other Income/(Expense)Investment
      income
                                                      
                                                      
                                                      2(q)
                                                      
                                                      
                                                      
                                                      213,772
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -Other
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      29,942
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      438,186Other
      expense
                                                      
                                                      
                                                      18
                                                      
                                                      
                                                      
                                                      (18,890
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (93,324
                                                      )Interest
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      149,270
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -Interest
      expense
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (197,959
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (78,237
                                                      )Total
      other income/(expense)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      176,136
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      266,625Earnings
      from continued operation
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      8,228,921
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      5,496,573Income
      tax
                                                      
                                                      
                                                      2(r),11
                                                      
                                                      
                                                      
                                                      (532,500
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (423,284
                                                      )Gain/(Loss)
      from discontinued operation, net of
    tax
                                                      
                                                      
                                                      15
                                                      
                                                      
                                                      
                                                      10,950
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -Net
      income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      7,707,370
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      5,073,289Constructive
      Preferred Dividend - Amortization of Beneficial Conversion
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1,264,500
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (6,418,864
                                                      )Income
      Available to Common Stockholders
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      6,442,870
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      (1,345,575
                                                      )Earnings
      per share
                                                      
                                                      
                                                      2(z),17Basic
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      0.36
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      (0.09
                                                      )Diluted
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      0.29
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      (0.09
                                                      )Weighted
      Average Shares Outstanding
                                                      
                                                      
                                                      17Basic
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      17,876,078
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      14,693,186Diluted
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      22,541,911
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      15,699,003





See
Accompanying Notes to Financial Statements and Accountant’s
Report


F-4


SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


AS
OF DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Preferred Stock B
                      
                      
                      Preferred Stock B-1Shares
                        Outstanding
                      
                      
                      Amount
                      
                      
                      Additional Paid In
                        Capital-Preferred Stock B
                      
                      
                      Additional Paid in Capital-
                        Warrants Series: A, B, J, C, D
                      
                      
                      Additional Paid in
                        Capital-Beneficial
                        Conversion Feature
                      
                      
                      Shares
                        Outstanding
                      
                      
                      Amount
                      
                      
                      Additional Paid In
                        Capital- Preferred
                        Stock B-1
                      
                      
                      Additional Paid in
                        Capital-Beneficial
                        Conversion FeatureBalance,
      January 1, 2006
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Reverse
      acquisition
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Preferred Stock B and Warrants
                      
                      
                      4,023,268
                      
                      
                      
                      4,023
                      
                      
                      
                      3,817,049
                      
                      
                      
                      3,439,764
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Constructive
      Preferred Dividend-Amortization of Beneficial Conversion
      Feature
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,418,864
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Appropriations
      of Retained Earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2006
                      
                      
                      4,023,268
                      
                      
                      
                      4,023
                      
                      
                      
                      3,817,049
                      
                      
                      
                      3,439,764
                      
                      
                      
                      6,418,864
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      January 1, 2007
                      
                      
                      4,023,268
                      
                      
                      
                      4,023
                      
                      
                      
                      3,817,049
                      
                      
                      
                      3,439,764
                      
                      
                      
                      6,418,864
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Common Stock from conversion of Warrants J in connection with May
      financing transaction
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (171,284
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Common Stock and Preferred Stock in connection with September financing
      transaction
                      
                      
                      1,375,479
                      
                      
                      
                      1,375
                      
                      
                      
                      1,912,357
                      
                      
                      
                      (2,957,370
                      )
                      
                      
                      1,182,471
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      132,662
                      
                      
                      
                      82,029Conversion
      of Preferred Stock B to Common Stock
                      
                      
                      (426,888
                      )
                      
                      
                      (427
                      )
                      
                      
                      (405,434
                      )
                      
                      
                      -
                      
                      
                      
                      (681,072
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of Common Stock to Minority Shareholders in connection with Pegasus
      Telecom
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Shares
      Cancelled
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of 2006 Make Good Common Stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Appropriations
      of Retained Earnings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Foreign
      Currency Translation Adjustment
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance,
      December 31, 2007
                      
                      
                      4,971,859
                      
                      
                      
                      4,972
                      
                      
                      
                      5,323,972
                      
                      
                      
                      311,110
                      
                      
                      
                      6,920,263
                      
                      
                      
                      95,418
                      
                      
                      
                      95
                      
                      
                      
                      132,662
                      
                      
                      
                      82,029





See Accompanying Notes to Financial
Statements and Accountant’s Report




F-5




SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


AS
OF DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Common StockShares
                                Outstanding
                              
                              
                              Amount
                              
                              
                              Additional Paid
                                In Capital
                              
                              
                              Additional Paid in
                                Capital-Warrants Series: E,G
                              
                              
                              Additional Paid in
                                Capital-Warrants Series: F,R
                              
                              
                              Statutory
                                Reserve
                              
                              
                              Retained
                                Earnings
                              
                              
                              Accumulated Other
                                Comprehensive Income
                              
                              
                              TotalBalance,
      January 1, 2006
                              
                              
                              14,361,646
                              
                              
                              
                              14,362
                              
                              
                              
                              4,812,363
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,219,720
                              
                              
                              
                              6,311,794
                              
                              
                              
                              267,865
                              
                              
                              
                              12,626,104Net
      Income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,073,289
                              
                              
                              
                              -
                              
                              
                              
                              5,073,289Reverse
      acquisition
                              
                              
                              331,540
                              
                              
                              
                              331
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (202,678
                              )
                              
                              
                              -
                              
                              
                              
                              (202,347
                              )Issuance
      of Preferred Stock B and Warrants
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              7,260,836Constructive
      Preferred Dividend-Amortization of Beneficial Conversion
      Feature
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (6,418,864
                              )
                              
                              
                              -
                              
                              
                              
                              -Appropriations
      of Retained Earnings
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              805,302
                              
                              
                              
                              (805,302
                              )
                              
                              
                              -
                              
                              
                              
                              -Foreign
      Currency Translation Adjustment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              556,431
                              
                              
                              
                              556,431Balance,
      December 31, 2006
                              
                              
                              14,693,186
                              
                              
                              
                              14,693
                              
                              
                              
                              4,812,363
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,025,022
                              
                              
                              
                              3,958,239
                              
                              
                              
                              824,296
                              
                              
                              
                              25,314,313Balance,
      January 1, 2007
                              
                              
                              14,693,186
                              
                              
                              
                              14,693
                              
                              
                              
                              4,812,363
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,025,022
                              
                              
                              
                              3,958,239
                              
                              
                              
                              824,296
                              
                              
                              
                              25,314,313Net
      Income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              7,707,370
                              
                              
                              
                              -
                              
                              
                              
                              7,707,370Issuance
      of Common Stock from conversion of Series J Warrants in connection with
      May financing transaction
                              
                              
                              1,094,891
                              
                              
                              
                              1,095
                              
                              
                              
                              1,600,778
                              
                              
                              
                              1,157,170
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,587,759Issuance
      of Common Stock and Preferred Stock B & B-1 in connection with
      September financing transaction
                              
                              
                              8,340,762
                              
                              
                              
                              8,341
                              
                              
                              
                              15,696,978
                              
                              
                              
                              (1,109,224
                              )
                              
                              
                              107,652
                              
                              
                              
                              
                              
                              
                              
                              (1,264,500
                              )
                              
                              
                              -
                              
                              
                              
                              13,792,867Conversion
      of Preferred Stock B to Common Stock
                              
                              
                              426,888
                              
                              
                              
                              427
                              
                              
                              
                              1,086,506
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Issuance
      of Common Stock to Minority Shareholders in connection with Pegasus
      Telecom
                              
                              
                              3,650
                              
                              
                              
                              4
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              4Shares
      Cancelled
                              
                              
                              (3,274
                              )
                              
                              
                              (3
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (3
                              )Issuance
      of 2006 Make Good Common Stock
                              
                              
                              321,168
                              
                              
                              
                              321
                              
                              
                              
                              (321
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Appropriations
      of Retained Earnings
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,233,179
                              
                              
                              
                              (1,233,179
                              )
                              
                              
                              -
                              
                              
                              
                              -Foreign
      Currency Translation Adjustment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,444,297
                              
                              
                              
                              1,444,297Balance,
      December 31, 2007
                              
                              
                              24,877,271
                              
                              
                              
                              24,877
                              
                              
                              
                              23,196,304
                              
                              
                              
                              47,946
                              
                              
                              
                              107,652
                              
                              
                              
                              3,258,201
                              
                              
                              
                              9,167,930
                              
                              
                              
                              2,268,593
                              
                              
                              
                              50,846,606





See
Accompanying Notes to Financial Statements and Accountant’s
Report


F-6


SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


AS
OF DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)




Accumulated Comprehensive Income


2006
                                
                                
                                2007
                                
                                
                                TotalComprehensive IncomeNet
      Income
                                
                                
                                5,073,289
                                
                                
                                
                                7,707,370
                                
                                
                                
                                12,780,659Other Comprehensive IncomeForeign
      Currency Translation Adjustment
                                
                                
                                556,431
                                
                                
                                
                                1,444,297
                                
                                
                                
                                2,000,728Total
                                
                                
                                5,629,720
                                
                                
                                
                                9,151,667
                                
                                
                                
                                14,781,387





See
Accompanying Notes to Financial Statements and Accountant’s
Report


F-7


SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOW


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





2007
                    
                    
                    2006Cash Flow from Operating ActivitiesNet
      Income
                    
                    $
                    7,707,370
                    
                    
                    $
                    5,073,289Depreciation
      expense
                    
                    
                    1,301,480
                    
                    
                    
                    155,374Amortization
      expense
                    
                    
                    323,815
                    
                    
                    
                    -Loss/(gain)
      on disposal of discontinued operation
                    
                    
                    (10,950
                    )
                    
                    
                    -Withdraw/(invested)
      in restricted time deposits
                    
                    
                    2,645,621
                    
                    
                    
                    (3,124,541
                    )Decrease/(increase)
      in accounts and other receivables
                    
                    
                    (2,390,699
                    )
                    
                    
                    109,201Increase
      in inventory
                    
                    
                    (56,183
                    )
                    
                    
                    -Increase
      in prepaid expenses
                    
                    
                    (178,501
                    )
                    
                    
                    -Increase
      in accounts and other payables
                    
                    
                    3,724,740
                    
                    
                    
                    407,184Cash
      Sourced/(Used) in Operating Activities
                    
                    
                    13,066,694
                    
                    
                    
                    2,620,507Cash
      Flows from Investing ActivitiesCash
      paid for acquisitions
                    
                    
                    (4,337,000
                    )
                    
                    
                    (1,485,000
                    )Proceeds
      from the sale of Anping Weiye
                    
                    
                    422,280
                    
                    
                    
                    -Investment
      in equity
                    
                    
                    (1,479,611
                    )
                    
                    
                    (495,651
                    )Purchase
      of property, plant, and equipment
                    
                    
                    (10,644,532
                    )
                    
                    
                    (6,366,540
                    )Purchase
      of goodwill
                    
                    
                    (1,513,348
                    )
                    
                    
                    (21,454
                    )Purchase
      of other intangible asset
                    
                    
                    (380,886
                    )
                    
                    
                    (20,565
                    )Increase
      in construction in progress
                    
                    
                    (6,215,626
                    )
                    
                    
                    (1,208,896
                    )Cash
      Sourced/(Used) in Investing Activities
                    
                    
                    (24,148,723
                    )
                    
                    
                    (9,598,106
                    )Cash
      Flows from Financing ActivitiesProceeds
      from bank borrowing
                    
                    
                    48,163
                    
                    
                    
                    2,600,574Proceeds
      from issuance of preferred stock B & warrants
                    
                    
                    -
                    
                    
                    
                    9,281,600Proceeds
      used to purchase Shell
                    
                    
                    -
                    
                    
                    
                    (675,000
                    )Cost
      for issuance of preferred stock B & warrants
                    
                    
                    -
                    
                    
                    
                    (1,345,764
                    )Proceeds
      from conversion of warrants J
                    
                    
                    3,000,000
                    
                    
                    
                    -Cost
      for conversion of warrants J
                    
                    
                    (412,241
                    )
                    
                    
                    -Proceeds
      from issuance of common stock
                    
                    
                    18,766,700
                    
                    
                    
                    -Proceeds
      used to purchase back warrants A & B
                    
                    
                    (3,500,000
                    )
                    
                    
                    -Cost
      for issuance of common stock
                    
                    
                    (1,473,833
                    )
                    
                    
                    -Cash
      Sourced/(Used) in Financing Activities
                    
                    
                    16,428,788
                    
                    
                    
                    9,861,410Net
      increase in cash & cash equivalents for the year
                    
                    
                    5,346,760
                    
                    
                    
                    2,883,811Cash
      received from acquisitions of Chenguang & Guannan
                    
                    
                    485,860
                    
                    
                    
                    -Effect
      of currency translation on cash and cash equivalents
                    
                    
                    1,444,297
                    
                    
                    
                    183,668Cash
      & cash equivalents at the beginning of year
                    
                    
                    3,638,673
                    
                    
                    
                    571,194Cash
      & cash equivalents at the end of year
                    
                    $
                    10,915,590
                    
                    
                    $
                    3,638,673Supplementary
      cash flow informationInterest
      received
                    
                    $
                    149,270
                    
                    
                    $
                    -Interest
      paid
                    
                    $
                    197,959
                    
                    
                    $
                    78,237Income
      tax paid
                    
                    $
                    774,555
                    
                    
                    $
                    615,694





See
Accompanying Notes to Financial Statements and Accountant’s
Report


F-8





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





1.
              ORGANIZATION
      AND PRINCIPAL ACTIVITIES





Sino Gas
International Holdings, Inc. (the “Company”) was incorporated under the laws of
the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
changed its name to American Arms, Inc. on April 5, 1984, and then changed its
name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to
Sino Gas International Holdings, Inc. on November 17, 2006.





On
September 7, 2006, the Company underwent a reverse-merger with Gas Investment
China Ltd. (“GIC”), an International Business Company incorporated in the
British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange
of shares whereby the Company issued an aggregate of 14,361,646 shares to the
shareholders of GIC in exchange for all of the issued and outstanding shares of
GIC. For financial reporting purposes, this transaction is classified as a
recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer,
accounting acquiree) and the historical financial statements of Gas Investment
China Co. Ltd. (Legal acquiree, accounting acquirer)





The
Company is a natural gas services operator, principally engaging in the
investment, operation and management of city gas pipeline infrastructure, in the
distribution of natural gas to residential and industrial users, in the
construction and operation gas stations, and in the development and application
of natural gas related technologies. The Company owns and operates 24 natural
gas distribution systems serving approximately 87,500 residential and five
commercial and industrial customers. The Company’s facilities include
approximately 700 kilometers of pipeline and delivery networks (including
delivery trucks) with a designed daily capacity of approximately 70,000 cubic
meters of natural gas.





The
common stock of the Company is currently quoted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.





Basis of Presentation and
Organization





The
Company’s consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”).




This
basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Company’s principal subsidiaries,
which are prepared in accordance with the accounting principles and the relevant
financial regulations applicable to enterprises with limited liabilities
established in the PRC (“PRC GAAP”) or in the accounting standards used in the
places of their domicile. The accompanying consolidated financial statements
reflect necessary adjustments not recorded in the books of account of the
Company’s subsidiaries to present them in conformity with US
GAAP.


F-9


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





(a) Method of
Accounting





The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.





(b)
Use of
estimates





The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however actual results
could differ materially from those estimates.




(c) Economic
and political risks





The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.




The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to law and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.




F-10





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





(d)
Principles of
Consolidation





The
consolidated financial statements include the accounts of the Company and its
subsidiaries (“the Group”). Significant inter-company transactions have been
eliminated in consolidation. Investments in which the company has a 20 percent
to 50 percent voting interest and where the company exercises significant
influence over the investor are accounted for using the equity
method.





The
Company owned its subsidiaries soon after its inception and continued to acquire
and own the equity interests throughout the reporting periods. The following
table depicts the identities of the consolidating subsidiaries as of December
31, 2007 and 2006 (whichever applicable 2006).





Name
      of Company
                    
                    Place
      of Incorporation
                    
                    Date
      of Incorporation
                    
                    Beneficiary
      Interest %
                    
                    Equity
      Interest %
                    
                    Registered
      CapitalGAS
      Investment China Co., Ltd.
                    
                    The
      British
                      Virgin
      Islands
                    
                    6/19/2003
                    
                    100
                    
                    100
                    
                    USD
                      10,000,000Sino
      Gas Construction, Ltd.
                    
                    The
      British
                      Virgin
      Islands
                    
                    1/9/2007
                    
                    100
                    
                    100
                    
                    USD
                      50,000Sino
      Gas Investment Development, Ltd.
                    
                    The
      British
                      Virgin
      Islands
                    
                    1/9/2007
                    
                    100
                    
                    100
                    
                    USD
                      50,000Beijing
      Zhong Ran Wei Ye Gas Co., Ltd.
                    
                    PRC
                    
                    8/29/2001
                    
                    100
                    
                    100
                    
                    RMB
                      150,000,000Beijing
      Chenguang Gas, Ltd.
                    
                    PRC
                    
                    10/30/2002
                    
                    100
                    
                    100
                    
                    RMB
                      20,000,000Guannan
      Weiye Gas Co., Ltd.
                    
                    PRC
                    
                    6/19/2003
                    
                    100
                    
                    100
                    
                    RMB
                      9,510,000




F-11


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Ningjin
      Weiye Gas Co., Ltd
                
                PRC
                
                12/3/2003
                
                100
                
                95
                
                RMB
                  3,000,000Yutian
      Zhongran Weiye Gas Co., Ltd.
                
                PRC
                
                12/19/2003
                
                100
                
                90
                
                RMB
                  3,000,000Xingtang
      Weiye Gas Co., Ltd.
                
                PRC
                
                2/18/2004
                
                100
                
                95
                
                RMB
                  3,000,000Wuqiao
      Gas Co., Ltd.
                
                PRC
                
                6/30/2004
                
                100
                
                95
                
                RMB
                  2,000,000Jinzhou
      Weiye Gas Co., Ltd.
                
                PRC
                
                7/19/2004
                
                100
                
                95
                
                RMB
                  5,000,000Sihong
      Weiye Gas Co., Ltd.
                
                PRC
                
                12/3/2004
                
                100
                
                95
                
                RMB
                  10,000,000Sishui
      Weiye Gas Co., Ltd.
                
                PRC
                
                12/22/2004
                
                100
                
                95
                
                RMB
                  3,000,000Langfang
      Weiye Dangerous Goods Transportation Co., Ltd.
                PRC
                
                3/22/2005
                
                100
                
                95
                
                RMB
                  1,000,000Linzhang
      Weiye Gas Co., Ltd.
                
                PRC
                
                7/6/2005
                
                100
                
                85
                
                RMB
                  1,000,000Peixian
      Weiye Gas Co., Ltd.
                
                PRC
                
                8/22/2005
                
                100
                
                90
                
                RMB
                  5,000,000Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
                PRC
                
                9/30/2005
                
                100
                
                100
                
                RMB
                  2,000,000Longyao
      Zhongran Weiye Gas Co., Ltd.
                
                PRC
                
                10/13/2005
                
                100
                
                95
                
                RMB
                  3,000,000





F-12


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Yuxian
      Jinli Gas Co., Ltd.
                
                PRC
                
                11/8/2005
                
                100
                
                100
                
                RMB
                  9,500,000Hengshui
      Weiye Gas Co., Ltd.
                
                PRC
                
                12/20/2005
                
                100
                
                100
                
                RMB
                  3,000,000Shenzhou
      Weiye Gas Co., Ltd.
                
                PRC
                
                12/23/2005
                
                100
                
                95
                
                RMB
                  3,000,000Changli
      Weiye Gas Co., Ltd.
                
                PRC
                
                12/8/2006
                
                100
                
                100
                
                RMB
                  3,000,000Chenan
      Chenguang Gas Co., Ltd
                
                PRC
                
                1/23/2007
                
                100
                
                100
                
                RMB
                  1,500,000Wuhe
      Weiye Gas Co., Ltd.
                
                PRC
                
                1/30/2007
                
                100
                
                100
                
                RMB
                  3,000,000Xinji
      Zhongchen Gas Co., Ltd
                
                PRC
                
                2/7/2007
                
                100
                
                100
                
                RMB
                  3,000,000Gucheng
      Weiye Gas Co., Ltd.
                
                PRC
                
                3/21/2007
                
                100
                
                100
                
                RMB
                  3,000,000Luquan
      Chenguang Gas Co., Ltd.
                
                PRC
                
                4/27/2007
                
                100
                
                100
                
                RMB
                  2,000,000Shijiazhuang
      Chenguang Gas Co., Ltd.
                
                PRC
                
                6/14/2007
                
                100
                
                100
                
                RMB
                  2,000,000Nangong
      Weiye Gas Co., Ltd.
                
                PRC
                
                6/25/2007
                
                100
                
                100
                
                RMB
                  3,000,000Sixian
      Weiye Gas Co., Ltd.
                
                PRC
                
                9/3/2007
                
                100
                
                100
                
                RMB
                  3,000,000Baishan
      Weiye Gas Co., Ltd.
                
                PRC
                
                7/13/2007
                
                100
                
                100
                
                RMB
                  15,000,000




F-13


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





(e)
Cash and Cash
Equivalents





The
Company considers all cash and other highly liquid investments with initial
maturities of three months or less to be cash equivalents.





(f)
Accounts and Other
Receivable





Accounts
and other receivable are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. The
Company extends unsecured credit to customers in the normal course of business
and does not accrue interest on trade accounts receivable.





(g)
Advances to
Suppliers





Advances
to suppliers represent the cash paid in advance for purchasing raw materials.
The advances to suppliers are interest free and unsecured.





(h)
Investments in Equity
Securities





The
equity method of accounting was used to account for the Company’s investment in
equity securities for which the Company did not have controlling equity
interest.  Non controlling equity interest for the Company is
typically a position of less than 50% beneficial ownership.





The
consolidated statement of income includes the Company's share of the
post-acquisition results of the investment’s performance for the year. In the
consolidated balance sheet, investments in equity securities are stated at the
Company's share of the net assets of the investments plus any potential premium,
or less discounts paid at the time of acquisition, and less any identified
impairment loss.





Beijing
Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned
investment and is principally engaged in sale of compressed natural gas to
domestic households and industrial firms around the suburbs of Beijing as well
as the suburban areas of the Hebei Province and Tianjin.


F-14





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Place
      of Registration
                
                Form
      of Business Structure
                
                Registered
      Capital
                
                Nominal
      Value of Registered Capital
                
                Principle
      ActivitiesPRC
                
                Sino-foreign
      equity joint venture
                
                RMB
                  20,000,000
                
                40%
                
                Trading
      of natural gas and gas pipeline
construction





The
Company did not record any goodwill when it acquired its equity position in
Xiangke. Accordingly, in accordance with SFAS 142, the Company has not taken an
amortization expense of goodwill during the time it has carried a 40% stake in
Xiangke.





(i) Accounting for the
Impairment of Long-Lived Assets





The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.





If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.





During
the reporting periods, there was no impairment loss.





(J)
Plant and
Equipment





Plant and
equipment, other than construction in progress, are stated at cost less
depreciation and amortization and accumulated impairment loss. Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:





Gas
      Pipelines
                25
      yearsBuildings
                25
      yearsLeasehold
      Improvements
                25
      yearsMachinery
      & Equipment
                20
      yearsMotor
      Vehicles
                10
      yearsOffice
      Equipment
                8
      years


F-15





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.





(k)
Intangible
Assets





Intangible
assets, are stated at cost less amortization and accumulated impairment loss.
Amortization is provided over their estimated useful lives, using the
straight-line method. Estimated useful lives of the intangibles are as
follows:





Land
      use rights
                      
                      40
      - 50 yearsFranchises
                      
                      30
      yearsOther
      intangibles
                      
                      3
      years





(l)
Construction in
Progress





Construction
in progress represents the cost of constructing pipelines and is stated at cost.
Costs comprise direct and indirect incremental costs of acquisition or
construction. Completed items are transferred from construction in progress to
the gas pipelines of fixed assets when they are ready for their intended use.
The major cost of construction relates to construction materials, direct labor
wages and other overhead. Construction of pipeline, through which to distribute
natural gas, is one of the Group’s principal businesses. The Group builds city
main pipeline network and branch pipeline network to make gas connection to
resident users, industrial, and commercial users, with the objective of
generating revenue on gas connection and gas usage fees collected from these
customers. As of December 31, 2007, the pipelines under construction include
mainly the projects in Beijing. These projects, once completed, will
significantly increase the gas supply capacity.





(m)
Unearned
Revenue





Unearned
revenue represents prepayments by customers for gas purchases and advance
payments on construction and installation of pipeline contracts. The Company
records such prepayment as unearned revenue when the payments are
received.




F-16




SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





(n)
Financial
Instruments





The
carrying amounts of all financial instruments approximate fair value. The
carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities approximate fair value due to the short-term nature of these items.
The carrying amounts of borrowings approximate the fair value based on the
Company’s expected borrowing rate for debt with similar remaining maturities and
comparable risk.





(o)
Foreign Currency
Translation





The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB). The
consolidated financial statements are translated into United States dollars from
RMB at year-end exchange rates as to assets and liabilities and average exchange
rates as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred.




12/31/2007
                        
                        
                        12/31/2006Years
      end RMB : US$ exchange rate
                        
                        
                        7.3141
                        
                        
                        
                        7.8175Average
      yearly RMB : US$ exchange rate
                        
                        
                        7.6172
                        
                        
                        
                        7.9819





The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.




(p)
Revenue
Recognition





Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue.







F-17




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


(q)
Investment
Income





Investment
income represents the Group’s share of post-acquisition results of its
investment in equity securities for the year.





(r)
Income
Taxes





Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. As of December 31,
2007, there was no significant book to tax differences.





Pursuant
to the tax laws of PRC, general enterprises are subject to income tax at an
effective rate of 33%. Beijing Gas is in the natural gas industry whose
development is encouraged by the government. According to the income tax
regulation, any company engaged in the natural gas industry enjoys a favorable
tax rate. Also, Beijing Gas is exempt from corporate income tax for its first
two years and is then entitled to a 50% tax reduction for the succeeding three
years. The Company’s first profitable tax year was 2003. Accordingly, the
Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards,
the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of
Beijing Gas are subject to the effective rate of 25%.





(s) Advertising





The Group
expensed all advertising costs as incurred





(t)
concentration of
Credit Risk





Concentration
of credit risk is limited to accounts receivable and is subject to the financial
conditions of major customers. The Company does not require collateral or other
security to support accounts receivable. The Company conducts periodic reviews
of its clients’ financial condition and customers’ payment practices to minimize
collection risk on accounts receivable.





F-18




SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





(u)
Retirement
Benefits





Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred.





(v)
Statutory
Reserves





As
stipulated by the Company Law of the People's Republic of China (PRC) as
applicable to Chinese companies with foreign ownership, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:





i.
            Making
      up cumulative prior years' losses, if
any;


ii.
            Allocations
      to the "Statutory reserve" of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered
  capital;


iii.
            Allocations
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.





(w)
Statement of Cash
Flows





In
accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
the Company’s operations is calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.




(x)
Comprehensive
Income





Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements. The Company’s current component of other comprehensive
income is the foreign currency translation adjustment.





F-19




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


(y)
Recent Accounting
Pronouncements




In July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective for
the Company on January 1, 2007, with the cumulative effect of the change in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.




In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.





In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108, the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods, based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.





In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115 (" SFAS 159"). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair values. SFAS 159 is effective for
fiscal years after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 159 on our financial statements.





F-20




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
provides additional guidance on improving the relevance, representational
faithfulness, and comparability of the financial information that a reporting
entity provides in its financial reports about a business combination and its
effects. This Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
believes there will be no material impact on its financial statements upon
adoption of this standard.





In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This Statement is effective for fiscal
years and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company believes there will be no material impact on
its financial statements upon adoption of this standard.





The
management of the Company does not anticipate that the adoption of these six
standards will have a material impact on these consolidated financial
statements.





(z)
Earnings Per
Share





Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period.  Diluted
earnings per share is computed on the basis of the weighted average number of
shares of common stock plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method for warrants and
the as-if method for convertible securities.  Dilutive potential
common shares include outstanding warrants, and convertible preferred
stock.





F-21




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


3.
            RESTRICTED
      CASH





Restricted
Cash represents compensating balances held at banks to partially secure banking
facilities in the form of loans and notes payable.  The imposed
restrictions dictate that funds cannot be withdrawn when there are outstanding
loans and notes payable, and the funds are only allowed to be used to settle
bank indebtedness.  The funds deposited as compensating balances are
interest bearing.  The amount of cash restricted varies based on the
Bank’s credit policy at the time that the Company requests for increase or
extension of credit facilities.





4.
            ACCOUNTS
      RECEIVABLE




For
natural gas sales, it is due when the gas is sold. Normally, most of them are
settled by prepayments from the customers.





In
general for construction projects, deposits of 30% of total contract sum are
received from client when the project commences. Second payment of 30% is
received after the construction is completed for around 6 months. The final sum
of the remaining portion normally acts as retention money for quality warranty
to the developer. The retention money would be received by the company after the
1 year warranty period.





The
phrase "receivables are due within one year of aging" means the receivable that
are within one year of aging.





The
"amounts are not due within one year" are mostly retention money from
construction sales that are based on contracts. The continued demand from the
natural gas sales from them also help assure the amount could be collected. No
experience of wholly-unsettled accounts receivable in the years 2007 and
2006.





Trade
accounts receivable are recorded at the invoiced amount, net of allowances for
doubtful accounts and sales returns. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
customer facts and economic conditions.





F-22





SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


Outstanding
account balances are reviewed individually for collectibles. Account balances
are charged off against the allowance after all means of collection have been
exhausted and collection is improbable. To date, the Company has not charged off
any balances as it has yet to exhaust all means of collection. The Company does
not have any off-balance-sheet credit exposure to its customers, except for
outstanding notes receivable discounted with banks that are subject to recourse
for non-payment.





The
credit and billing policy is that, for the residential customer, we collect
prepayment from customers; for the industrial customers, we settle the payment
based on the contract terms signed, from 10 days to one month; for the
construction business, we collect the payment from customer based on the
percentage of the construction progress. The risk that business faces from
inability to collect account is operation risk in industrial
customers.





Accounts Receivable2007
                    
                    
                    2006Gross
      accounts receivable
                    
                    $
                    7,352,013
                    
                    
                    $
                    6,567,578Allowance
      for bad debt
                    
                    
                    (36,760
                    )
                    
                    
                    (32,838
                    )Net
      accounts receivable
                    
                    $
                    7,315,253
                    
                    
                    $
                    6,534,740





Allowance for Bad Debt2007
                      
                      
                      2006Beginning
      balance
                      
                      $
                      32,838
                      
                      
                      $
                      29,042Addition
                      
                      
                      3,922
                      
                      
                      
                      3,796Less
                      
                      
                      -
                      
                      
                      
                      -Ending
      balance
                      
                      $
                      36,760
                      
                      
                      $
                      32,838





Accounts Receivable Aging
      Report2007
                      
                      
                      200630
      Days
                      
                      $
                      5,557,172
                      
                      
                      $
                      5,481,05130-60
      Days
                      
                      
                      1,212,413
                      
                      
                      
                      14,67260-90
      Days
                      
                      
                      8,747
                      
                      
                      
                      333,12390-180
      Days
                      
                      
                      -
                      
                      
                      
                      -180-360
      Days
                      
                      
                      27,489
                      
                      
                      
                      42,612>360
      Days
                      
                      
                      509,433
                      
                      
                      
                      663,282Total
                      
                      $
                      7,315,254
                      
                      
                      $
                      6,534,740





F-23





SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


The
following is the largest ten accounts receivable at December 31
2007:





Baishan
      Jiehe Development & Construction Co., Ltd.
                  
                  $
                  200,844Shuqian
      Mingwei Development & Construction Co., Ltd.
                  
                  
                  241,998Peixian
      Jiannan Real Estate Development Co., Ltd.
                  
                  
                  313,367Sihong
      Jinwan Construction Co., Ltd.
                  
                  
                  316,101Xiuzhou
      Shenyuan Real Eastate Development Co., Ltd.
                  
                  
                  337,038Guannan
      Construction Co., Ltd.
                  
                  
                  345,360Lianyuangan
      Baoli Development Co., Ltd.
                  
                  
                  357,665Jianshu
      Province Farms
                  
                  
                  421,405Huabei
      Oil Management & Machine Co., Ltd.
                  
                  
                  555,365Hebei
      Zhonggang Steel Co., Ltd.
                  
                  
                  592,135Total
                  
                  $
                  3,681,282





5.
            INVESTMENT





2007
                  
                  
                  2006Beijing
      Zhongran Xiangke Oil Gas Technology Co. Ltd
                  
                  $
                  4,007,310
                  
                  
                  $
                  2,939,029





The
followings were the condensed balance sheets and statements of income ofBeijing Zhongran Xiangke
Oil Gas Technology Co., Ltd. as of and for the years ended December 31, 2007 and
2006.




Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
                                                      Condensed
      Balance Sheets2007
                                                    
                                                    
                                                    2006AssetsCurrent
      Assets
                                                    
                                                    $
                                                    4,351,320
                                                    
                                                    
                                                    $
                                                    4,583,010Non-Current
      Assets
                                                    
                                                    
                                                    13,736,685
                                                    
                                                    
                                                    
                                                    11,320,804Total
      Assets
                                                    
                                                    
                                                    18,088,005
                                                    
                                                    
                                                    
                                                    15,903,814LiabilitiesCurrent
      Liabilities
                                                    
                                                    
                                                    7,794,262
                                                    
                                                    
                                                    
                                                    6,852,718Total
      Liabilities
                                                    
                                                    
                                                    7,794,262
                                                    
                                                    
                                                    
                                                    6,852,718Net Assets
                                                    
                                                    $
                                                    10,293,742
                                                    
                                                    
                                                    $
                                                    9,051,096




F-24




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
                                        Condensed
      Statements of Income2007
                                      
                                      
                                      2006Sales
      revenue
                                      
                                      $
                                      5,819,210
                                      
                                      
                                      $
                                      6,795,876Cost
      of revenue
                                      
                                      
                                      (3,287,090
                                      )
                                      
                                      
                                      3,984,152Gross
      profit
                                      
                                      
                                      2,532,120
                                      
                                      
                                      
                                      2,811,724Operating
      expenses
                                      
                                      
                                      (1,811,203
                                      )
                                      
                                      
                                      (1,518,622
                                      )Other
      income/(expense)
                                      
                                      
                                      (110,634
                                      )
                                      
                                      
                                      (192,810
                                      )Earnings
      before taxation
                                      
                                      
                                      1,319,164
                                      
                                      
                                      
                                      1,100,292Income
      tax
                                      
                                      
                                      (91,543
                                      )
                                      
                                      
                                      (82,522
                                      )Net
      income
                                      
                                      $
                                      1,227,622
                                      
                                      
                                      $
                                      1,017,770





6.
            PROPERTY, PLANT, AND EQUIPMENT,
      NET





Property,
Plant, and Equipment consisted of the followings at December 31, 2007 and
2006:





At Cost
                      
                      2007
                      
                      
                      2006Gas
      Pipelines
                      
                      $
                      18,885,734
                      
                      
                      $
                      8,255,231Motor
      Vehicles
                      
                      
                      4,874,685
                      
                      
                      
                      2,204,621Machinery
      & Equipment
                      
                      
                      885,997
                      
                      
                      
                      273,943Buildings
                      
                      
                      1,405,638
                      
                      
                      
                      89,799Leasehold
      Improvements
                      
                      
                      68,942
                      
                      
                      
                      47,543Office
      Equipment
                      
                      
                      105,336
                      
                      
                      
                      67,77426,226,335
                      
                      
                      
                      10,938,911Less:Accumulated
      depreciation
                      
                      
                      (1,653,771
                      )
                      
                      
                      (330,381
                      )$
                      24,572,565
                      
                      
                      $
                      10,608,530





F-25




SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Accumulated Depreciation
                  
                  2007
                  
                  
                  2006Gas
      Pipelines
                  
                  $
                  591,419
                  
                  
                  $
                  203,005Motor
      Vehicles
                  
                  
                  687,354
                  
                  
                  
                  48,846Machinery
      & Equipment
                  
                  
                  161,703
                  
                  
                  
                  38,999Buildings
                  
                  
                  128,514
                  
                  
                  
                  6,825Leasehold
      Improvements
                  
                  
                  34,070
                  
                  
                  
                  19,613Office
      Equipment
                  
                  
                  50,711
                  
                  
                  
                  13,093Total
                  
                  $
                  1,653,771
                  
                  
                  $
                  330,381





Depreciation
expenses included in the consolidated statements of income for the fiscal years
ended December 31, 2007 and 2006 were $1,323,390 and $184,215
respectively.





7.
            INTANGIBLE
      ASSETS





Intangible
assets consisted of the following at December 31, 2007 and 2006:





At Cost
                      
                      2007
                      
                      
                      2006Land
      use rights
                      
                      $
                      452,345
                      
                      
                      $
                      112,565Franchises
                      
                      
                      359,464
                      
                      
                      
                      314,864Goodwill
                      
                      
                      1,562,202
                      
                      
                      
                      21,454Others
                      
                      
                      9,563
                      
                      
                      
                      8,9472,383,574
                      
                      
                      
                      457,830Less: Accumulated
      Amortization
                      
                      
                      (355,324
                      )
                      
                      
                      -Intangible
      Assets, net
                      
                      $
                      2,028,250
                      
                      
                      $
                      457,830





The
Company operates as a local natural gas distributor in a city or county, known
as an operation location, under an exclusive franchise agreement between the
Company and the local government or entities in charge of gas utility.
Franchises are the rights to develop sites in Anping and Jinzhou in China. They
are stated at cost less accumulated amortization.





Goodwill
is related to the acquisitions of Beijing Chenguang Gas and Guannan Gas.
Management annually reviews the carrying value of goodwill using the sum of the
discounted cash flows to determine if an impairment charge is necessary. The
Company has determined no impairment to goodwill as of date.





F-26




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


8.
            SHORT-TERM
      BANK LOAN





Name of Bank
                                
                                Due Date
                                
                                Interest Rate
                                
                                2007
                                
                                
                                2006ChineseRenmin
      Bank
                                
                                7/1/2008
                                
                                7.22%
      plus 10% fluctuation market rate
                                
                                $
                                2,734,444
                                
                                
                                $
                                -Shenzhen
      Development Bank
                                
                                3/31/2007
                                
                                5.022%
      per annum
                                
                                
                                -
                                
                                
                                
                                2,430,445Total
                                
                                
                                
                                
                                
                                $
                                2,734,444
                                
                                
                                $
                                2,430,445





Interest
expenses for the short-term bank loans were $197,959 and $78,237 for the years
ended December 31, 2007 and 2006.





9.
            OTHER
      PAYABLES





Other
payables consisted of the following at December 31, 2007 and 2006:





2007
                      
                      
                      2006Employees’
      welfare payables
                      
                      $
                      176,236
                      
                      
                      $
                      56,584Amount
      due to employees
                      
                      
                      150,711
                      
                      
                      
                      11,360Tax
      payable
                      
                      
                      922,620
                      
                      
                      
                      1,089,804Other
      payable
                      
                      
                      9,134,091
                      
                      
                      
                      632,752Total
                      
                      $
                      10,383,658
                      
                      
                      $
                      1,790,500





All the
amounts due to employees are unsecured, interest free, and have no fixed
repayment terms.





F-27




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


10.
            CAPITAL
      STOCK





The
authorized capital stock consists of (i) 250,000,000 shares of common stock, par
value      $0.001 per share, of which 24,877,271
shares are issued and outstanding, and (ii) 100,000,000 shares of preferred
stock, par value $0.001 per share. The preferred stock consists of (a) series A
convertible preferred stock, with 20,000,000 shares authorized and 0 shares are
issued and outstanding; (b) series B convertible preferred stock, with 5,000,000
shares authorized and 4,971,859 shares are issued and outstanding; and (c)
series B-1 convertible preferred stock, with 3,000,000 shares authorized and
95,418 shares are issued and outstanding.





The
following is a summary of the material terms of its capital stock. This summary
is subject to and qualified in its entirety by its Articles of Incorporation, as
amended and corrected, certificates of designations for its series A, series B,
and series B-1 convertible preferred stock, its by-laws and by the applicable
provisions of Utah law.





Common
Stock





The
Company is authorized to issue 250,000,000 shares of common stock, with a par
value of $0.001. There are 24,877,271 shares of common stock issued and
outstanding at December 31, 2007. All shares of common stock have one vote per
share on all matters including election of directors, without provision for
cumulative voting. The common stock is not redeemable and has no conversion or
preemptive rights. The common stock currently outstanding is validly issued,
fully paid and non-assessable. In the event of liquidation of the company, the
holders of common stock will share equally in any balance of the company's
assets available for distribution to them after satisfaction of creditors and
preferred shareholders, if any. The holders of common stock are entitled to
equal dividends and distributions per share with respect to the common stock
when, as and if, declared by the board of directors from funds legally
available.





Preferred
Stock





In
addition to the 250,000,000 shares of common stock, the Company is authorized to
issue 100,000,000 shares of preferred stock, with a par value of $0.001 per
share. Shares of the preferred stock may be issued from time to time in one or
more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the board of directors
prior to the issuance.





F-28




SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





On August
30, 2006, the Company’s board of directors designated 20,000,000 shares of its
preferred stock as series A convertible preferred stock and 5,000,000 shares of
its preferred stock as series B convertible preferred stock. On August 31, 2006,
the Company filed certificates of designations for the series A and series B
convertible preferred stock with the Office of the Secretary of State of Utah.
On September 6, 2006, the board of directors amended the designations of the
Series B convertible preferred stock and the Company filed an amended
certificate of designations for the Series B convertible preferred stock with
the Office of the Secretary of State of Utah. The board of directors created the
series A convertible preferred stock to allow the Company to consummate the
share exchange transaction with the Gas (BVI) Shareholders and the series B
convertible preferred stock in connection with its private financing
transactions. Each of the shares of series A convertible preferred stock was
automatically converted into one share of its common stock upon the
effectiveness of its reverse stock-split on November 17, 2006. On September 12,
2007, the Company’s board of directors designated 3,000,000 shares of its
preferred stock as series B-1 convertible preferred stock with the same right
and privilege as series B convertible preferred stock, and 95,418 shares of
series B-1 preferred stock were issued in connection with the September
financing transaction. Therefore, at December 31, 2007, the Company has no
shares of series A convertible preferred stock issued and outstanding, and has
4,971,859 and 95,418 shares of series B and series B-1 convertible preferred
stock issued and outstanding respectively.





Conversion





The
Company issued 14,361,646 of its common shares upon the automatic conversion of
its series A convertible preferred shares after the 304.44-for-1 reverse
stock-split on November 17, 2006. The Company no longer has any series A
convertible preferred shares outstanding.





Each
share of the series B convertible preferred stock will become convertible into
common stock, at the option of its holder after the 304.44-for-1 reverse
stock-split, based on the then applicable conversion rate, which is initially
one share of series B convertible preferred stock for one share of common
stock.





F-29





SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


Financing
Transactions





On
September 7, 2006, the Company entered into a stock purchase transaction with
Vision Opportunity Master Fund, Ltd., SEI Private Trust Co., and Coronado
Capital Partners LP by issuing  2,509,782 shares of series B
convertible preferred stock for an aggregate of $6,876,800 in gross cash
proceeds. Pursuant to the Purchase Agreement, 2,509,782 Series A Warrants,
1,254,891 Series B Warrants, 2,284,651 Series J Warrants, 2,284,651 Series C
Warrants and 1,142,326 Series D Warrants were issued to the private placement
investors. Simultaneously, 635,822 shares of series B convertible preferred
stock and 241,708 Series A Warrants were issued to the placement agent Kuhns’
Brother. Among the gross proceeds of $6,876,800, $675,000 was used to purchased
the Shell, Dolce Ventures, Inc. (Legal acquirer, accounting acquiree), $673,786
was reimbursed to the placement agent Kuhns’ Brother, and $426,978 was paid for
legal counsel expense. The Company received $5,101,036 net
proceeds.





On
October 20, 2006, the Company entered into another stock purchase transaction
with Vision Opportunity Master Fund, Ltd., Nite Capital LP, and Ijaz Malik by
issuing 877,664 shares of series B convertible preferred stock for an aggregate
of $2,404,800 in gross cash proceeds. Pursuant to the Purchase Agreement,
877,664 Series A Warrants, 438,833 Series B Warrants, 798,938 Series J Warrants,
798,938 Series C Warrants and 399,469 Series D Warrants were issued to the
private placement investors. Simultaneously, $235,000 of gross proceeds were
reimbursed to the private placement agent and $10,000 of gross proceeds were
paid to transfer agent respectively. The Company received $2,159,800 net
proceeds.





On May
15, 2007, Vision Opportunity Master Fund, Ltd. exercised 1,094,891 shares of
Series J Warrants at $2.74 per share. The Company received $3,000,000 cash gross
proceeds. In consideration of exercise of Series J Warrants, 1,094,891 new
Series E Warrants and 109,489 Series G Warrants were issued to Vision and
placement agent Kuhns’ Brother respectively. Pursuant to the financial advisory
agreement between the Company and the placement agent Kuhns’ Brother, the
Company totally reimbursed $268,868 of the gross proceeds to placement agent.
$146,374 was paid for legal counsel expense. The Company
received $2,587,759 net proceeds.





F-30




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)





On
September 7, 2007, the Company entered into a securities purchase agreement with
a series of private placement investors leading by Vision Opportunity Master
Fund, Ltd. for a sale of 8,340,762 shares of the Company’s common stock. The
Company generated an aggregate of $18,766,700 gross proceeds. Simultaneously,
the Company entered into a Warrant Purchase Agreement, Amendment and Waiver
(“WPA”) with the holders of its outstanding Warrants and Series B Preferred
Stock, who acquired those securities by private placement in September and
October of 2006. Pursuant to the WPA, all of the Series A and Series B Warrants
issued in 2006 were purchased back by the Company for $3,500,000; the exercise
price of Series C Warrants was changed to $3.375; all of the Series D Warrants
was purchased for a purchase price of issuing additional 770,897 shares of
Series B preferred Stock; all of the outstanding Series J and Series E Warrants
were cancelled; additional 271,074 Series F Warrants and 271,074 Series R
Warrants were issued respectively. Among the $18,766,700 cash gross proceeds,
$3,500,000 was used to purchase back the Series A and Series B Warrants issued
in 2006 from private placement investors; $1,241,805 was reimbursed to the
placement agent Roth Capital, including the out-of-pocket expenses, and $232,028
was paid for legal counsel expense. The Company received $13,792,867 net
proceeds.





Financial
      Transactions9/7/2006
                  
                  
                  10/20/2006
                  
                  
                  5/15/2007
                  
                  
                  9/7/2007Gross
      proceeds
                  
                  $
                  6,876,800
                  
                  
                  $
                  2,404,800
                  
                  
                  $
                  3,000,000
                  
                  
                  $
                  18,766,700Used
      to purchase Shell
                  
                  
                  (675,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Commission
      to Placement Agent
                  
                  
                  (673,786
                  )
                  
                  
                  (235,000
                  )
                  
                  
                  (265,867
                  )
                  
                  
                  (1,241,805
                  )Legal
      counsel expense
                  
                  
                  (426,978
                  )
                  
                  
                  -
                  
                  
                  
                  (146,374
                  )
                  
                  
                  (232,028
                  )Paid
      to Transfer Agent
                  
                  
                  -
                  
                  
                  
                  (10,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Used
      to purchase Warrants A & B
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,500,000
                  )Net
      proceeds
                  
                  $
                  5,101,036
                  
                  
                  $
                  2,159,800
                  
                  
                  $
                  2,587,759
                  
                  
                  $
                  13,792,867





The
following table depicts the issued and outstanding shares of Common Stock,
Preferred Stock, and Warrants at December 31, 2007.





Authorized Shares
                
                
                Shares issued and
                  outstandingCommon
      Stock
                
                
                250,000,000
                
                
                
                24,877,271Convertible
      Preferred Stock A
                
                
                10,000,000
                
                
                
                -Convertible
      Preferred Stock B
                
                
                5,000,000
                
                
                
                4,971,859Convertible
      Preferred Stock B-1
                
                
                3,000,000
                
                
                
                95,418





Strike Price
                    
                    Contractual Life
                    
                    Expiration
                      Date
                    
                    Shares issued and
                      outstanding
                    
                    
                    Weighted Average
                      Fair ValueSeries
      A Warrants
                    
                    
                    3.84
                    
                    60
      Months
                    
                    9/6/2011
                    
                    
                    241,708
                    
                    
                    
                    0.70Series
      C Warrants
                    
                    
                    3.38
                    
                    60
      Months
                    
                    9/6/2011
                    
                    
                    3,083,589
                    
                    
                    
                    0.81Series
      F Warrants
                    
                    
                    4.84
                    
                    36
      Months
                    
                    9/6/2010
                    
                    
                    271,074
                    
                    
                    
                    0.20Series
      G Warrants
                    
                    
                    3.84
                    
                    48
      Months
                    
                    9/6/2011
                    
                    
                    109,489
                    
                    
                    
                    0.44Series
      R Warrants
                    
                    
                    4.84
                    
                    36
      Months
                    
                    9/6/2010
                    
                    
                    271,074
                    
                    
                    
                    0.20Outstanding
      Option
                    
                    
                    3.00
                    
                    48
      Months
                    
                    11/1/2010
                    
                    
                    100,000
                    
                    
                    
                    0.92





F-31





SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006
 (Stated
in U.S. Dollars)


The
Company used the Black-Scholes model to calculate the values of Warrants. The
following shows the assumptions that were employed in the model:




Warrants A
                
                
                Warrants C
                
                
                Warrants F
                
                
                Warrants G
                
                
                Warrants R
                
                
                Outstanding
                  OptionWeighted-average
      fair value of warrants
                
                
                0.70
                
                
                
                0.81
                
                
                
                0.20
                
                
                
                0.44
                
                
                
                0.20
                
                
                
                0.92Strike
      price
                
                $
                3.84
                
                
                $
                3.38
                
                
                $
                4.84
                
                
                $
                3.84
                
                
                $
                4.84
                
                
                $
                3.00Risk-free
      interest rate
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %
                
                
                4.18
                %Expected
      volatility
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %
                
                
                40.00
                %Years
      to maturity
                
                
                5.00
                
                
                
                5.00
                
                
                
                3.00
                
                
                
                4.00
                
                
                
                3.00
                
                
                
                4.00





F-32


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Total
Capitalization





The
following table depicts an analysis of total capitalization for the issuance of
Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional
Paid in Capital at December 31, 2007:





Preferred Stock B
                
                
                Preferred Stock B-1
                
                
                Common StockName of
                  Shareholders
                
                Number of Shares
                  outstanding
                
                
                Capital
                
                
                Number of Shares
                  outstanding
                
                
                Capital
                
                
                Number of Shares
                  outstanding
                
                
                Capital
                
                
                Additional Paid
                  in Capital
                
                
                % of Equity
                  HoldingsManager
      / Insider
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,653,661
                
                
                
                12,654
                
                
                
                4,064,862
                
                
                
                51
                %Minority
      Investor
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,326,788
                
                
                
                2,327
                
                
                
                747,457
                
                
                
                9
                %Private
      Placement- Investor
                
                
                4,971,859
                
                
                
                4,972
                
                
                
                95,418
                
                
                
                95
                
                
                
                9,896,821
                
                
                
                9,897
                
                
                
                24,307,327
                
                
                
                40
                %Beneficial-
      Conversion Feature
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,002,292
                
                
                
                -4,971,859
                
                
                
                4,972
                
                
                
                95,418
                
                
                
                95
                
                
                
                24,877,271
                
                
                
                24,877
                
                
                
                36,121,938
                
                
                
                100
                %


F-33


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





11.
            INCOME
      TAX





In
accordance with the relevant tax laws and regulations of PRC, the corporation
income tax rate is 33%. However, in accordance with the relevant taxation laws
in the PRC, the Company is eligible for tax concessions and was exempted from
part of the PRC income taxes for the year.





Effective
January 1, 2008, PRC government implements a new 25% tax rate for all
enterprises regardless of whether domestic or foreign enterprise without any tax
holiday, which is defined as "two-year exemption followed by three-year half
exemption" hitherto enjoyed by tax payers. As a result of the new tax law of a
standard 25% tax rate, tax holidays terminated as of December 31, 2007. However,
PRC government has established a set of transition rules to allow enterprises
that already started tax holidays before January 1, 2008, to continue enjoying
the tax holidays until being expired.





The
following table accounts for the differences between the actual tax provision
and the amounts obtained by applying the applicable PRC corporation income tax
rate of 33% to income before taxes for the years ended December 31, 2007 and
2006.





2007
                  
                  
                  2006Income
      before taxation
                  
                  $
                  8,228,921
                  
                  
                  $
                  5,496,573Provision
      for income taxes at PRC income tax rate
                  
                  
                  2,715,544
                  
                  
                  
                  1,813,869Effect
      of tax exemption granted to the Company
                  
                  
                  (2,183,044
                  )
                  
                  
                  (1,390,585
                  )Income
      Tax
                  
                  $
                  532,500
                  
                  
                  $
                  423,284


F-34


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)




12.
            SEGMENT
      INFORMATION





The
Company has contracted with customers usually in two revenue segments
altogether, one is for the construction and installation of gas facilities and
another one is the subsequent sales of gas to that customers through the gas
facilities the Company constructs. However, the respective gas facilities
contracts and gas supply contracts have separately provided for the basis of
revenue recognition and distinctive from each other for the relevant
cost-and-revenue to be incurred and hence separate calculation and subsequent
payment of fees for respective business without any interdependence on each
other in this respect.





For
management purposes, the company is currently organized into two major operating
divisions - gas pipeline construction (installation of gas facilities) and sales
of piped gas. These principal operating activities are the basis on which the
Company reports its primary segment information.





Balance
Sheet Segment Report


As
of December 31, 2007





GasDistribution
                      
                      
                      Gaspipeline
                        Installation
                      
                      
                      Others
                      
                      
                      TotalAssetsCurrent
      assets
                      
                      $
                      11,509,765
                      
                      
                      $
                      3,814,583
                      
                      
                      $
                      7,866,957
                      
                      
                      $
                      23,191,305Non-current
      assets
                      
                      
                      10,606,803
                      
                      
                      
                      31,558,142
                      
                      
                      
                      -
                      
                      
                      
                      42,164,945Total
      assets
                      
                      
                      22,116,568
                      
                      
                      
                      35,372,725
                      
                      
                      
                      7,866,957
                      
                      
                      
                      65,356,250LiabilitiesCurrent
      liabilities
                      
                      
                      1,228,727
                      
                      
                      
                      13,149,074
                      
                      
                      
                      131,843
                      
                      
                      
                      14,509,644Total
      liabilities
                      
                      
                      1,228,727
                      
                      
                      
                      13,149,074
                      
                      
                      
                      131,843
                      
                      
                      
                      14,509,644Net Assets
                      
                      $
                      20,887,841
                      
                      
                      $
                      22,223,651
                      
                      
                      $
                      7,735,114
                      
                      
                      $
                      50,846,606


F-35


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Statement
of Income Segment Report


For
the fiscal year ended December 31, 2007





GasDistribution
                
                
                Gaspipeline
                  Installation
                
                
                Others
                
                
                TotalSales
      revenue
                
                $
                7,294,608
                
                
                $
                12,973,148
                
                
                $
                -
                
                
                $
                20,267,756Cost
      of revenue
                
                
                (6,374,365
                )
                
                
                (3,125,387
                )
                
                
                -
                
                
                
                9,499,752Gross
      profit
                
                
                920,243
                
                
                
                9,847,761
                
                
                
                -
                
                
                
                10,768,004Operating
      expenses
                
                
                (209,418
                )
                
                
                (2,241,032
                )
                
                
                (264,769
                )
                
                
                (2,715,219
                )Other
      income/expense
                
                
                4,080
                
                
                
                43,665
                
                
                
                128,391
                
                
                
                176,136Earnings
      from continued operation
                
                
                714,905
                
                
                
                7,650,394
                
                
                
                (136,378
                )
                
                
                8,228,921Income
      tax
                
                
                (45,604
                )
                
                
                (486,896
                )
                
                
                -
                
                
                
                (531,612
                )Gain
      from discontinued operation, net of
    tax
                
                
                -
                
                
                
                -
                
                
                
                10,950
                
                
                
                10,950Net
      income
                
                $
                669,301
                
                
                $
                7,163,498
                
                
                $
                (125,428
                )
                
                $
                7,707,370





Balance
Sheet Segment Report


As
of December 31, 2006





GasDistribution
                      
                      
                      Gaspipeline
                        Installation
                      
                      
                      Others
                      
                      
                      TotalAssetsCurrent
      assets
                      
                      $
                      6,236,877
                      
                      
                      $
                      3,795,902
                      
                      
                      $
                      5,216,552
                      
                      
                      $
                      15,249,331Non-current
      assets
                      
                      
                      4,687,342
                      
                      
                      
                      13,946,123
                      
                      
                      
                      -
                      
                      
                      
                      18,633,465Total
      assets
                      
                      
                      10,924,219
                      
                      
                      
                      17,742,025
                      
                      
                      
                      5,216,552
                      
                      
                      
                      33,882,796LiabilitiesCurrent
      liabilities
                      
                      
                      722,382
                      
                      
                      
                      7,730,484
                      
                      
                      
                      115,617
                      
                      
                      
                      8,568,483Total
      liabilities
                      
                      
                      722,382
                      
                      
                      
                      7,730,484
                      
                      
                      
                      115,617
                      
                      
                      
                      8,568,483Net Assets
                      
                      $
                      10,201,837
                      
                      
                      $
                      10,011,541
                      
                      
                      $
                      5,101
                      
                      
                      $
                      25,314,313


F-36


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Statement
of Income Segment Report


For
the fiscal year ended December 31, 2006





GasDistribution
                
                
                Gaspipeline
                  Installation
                
                
                Others
                
                
                TotalSales
      revenue
                
                $
                3,912,502
                
                
                $
                6,958,216
                
                
                $
                -
                
                
                $
                10,870,718Cost
      of revenue
                
                
                (2,945,132
                )
                
                
                (1,444,010
                )
                
                
                -
                
                
                
                (4,389,142
                )Gross
      profit
                
                
                967,370
                
                
                
                5,514,206
                
                
                
                -
                
                
                
                6,481,576Operating
      expenses
                
                
                (96,534
                )
                
                
                (1,033,044
                )
                
                
                (122,050
                )
                
                
                (1,251,628
                )Other
      income/(expense)
                
                
                7,831
                
                
                
                83,811
                
                
                
                174,983
                
                
                
                266,625Earnings
      before tax
                
                
                878,667
                
                
                
                4,564,973
                
                
                
                145,401
                
                
                
                5,496,573Income
      tax
                
                
                (36,250
                )
                
                
                (387,034
                )
                
                
                -
                
                
                
                (423,284
                )Net
      income
                
                $
                842,417
                
                
                $
                4,177,939
                
                
                $
                52,933
                
                
                $
                5,073,289





The
Company's operations are located in the PRC. All revenue is from customers in
the PRC. All of the Company’s assets are located in the PRC. Sales of piped gas
and gas pipeline construction are carried out in the PRC. Accordingly, no
analysis of the Company's sales and assets by geographical market is
presented.




No other
measures of segment profit or loss and assets have been provided or reviewed by
the company's chief operating decision maker.





13.
            COMMITMENTS
      UNDER OPERATING LEASES





At
December 31, 2007, the Group had commitment for future minimum lease payments
under non-cancelable operating leases in respect of office rented premises which
fall due as follows:





LandandBuildings
                  
                  2007
                  
                  
                  2006Not
      later than one year
                  
                  $
                  45,934
                  
                  
                  $
                  61,401Over
      one year but not later than five years
                  
                  
                  228,079
                  
                  
                  
                  245,603After
      five years
                  
                  
                  500,067
                  
                  
                  
                  521,906Total
                  
                  $
                  774,080
                  
                  
                  $
                  828,910


F-37


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





14.
              RELATED
      PARTIES TRANSACTIONS





The
following material transactions with related parties during the years were in
the opinion of the directors, carried out in the ordinary course of business and
on normal commercial terms:





Sales to
Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. (Zhongran Xiangke), an
investee for which the equity method is used, for the years 2007 and 2006 were
$85,951 and $334,326 respectively. The amounts receivable from Zhongran Xiangke
for the years 2007 and 2006 were $16,741 and $0 respectively. Also, included in
the other payables are payables to Zhongran Xiangke for the years 2007 and 2006
of $141,303 and $101,592 respectively.





Sales to
Beijing Zhongyou Xiangke Oil Gas Technology Co., Ltd. (Zhongyou Xiangke), an
investee of Zhongran Xiangke, for the years 2007 and 2006 were $ 0 and $ 0
respectively. The amounts receivable from Zhongyou Xiangke for the years 2007
and 2006 were $ 0 and $2,130 respectively.





15.
            DISCONTINUED
      OPERATION





On August
31, 2006, the Company’s Board of Directors approved the spin-off of its
wholly-owned subsidiary, Pegasus Tel, Inc. to the Company’s common stockholders.
To effect this spin-off, the Board announced a distribution of one share of
Pegasus common stock for every 20 shares of common stock held by the Company’
stockholders on August 30, 2006, involving 5,038,507 shares of Pegasus’ common
stock. Upon completion of the spin-off, the Company returned 100% of its shares
of common stock of Pegusas to Pegusas shareholders, which then were retired and
deemed to be treasury stock. The following tabulations are the condensed balance
sheets and statements of income of Pegasus Tel, Inc. as of and for the years
ended December 31, 2007 and 2006.


F-38


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Pegasus
Tel, Inc.


Condensed
Balance Sheets





2007
                          
                          
                          2006AssetsCurrent
      assets
                          
                          $
                          2,336
                          
                          
                          $
                          445Non-current
      assets
                          
                          
                          -
                          
                          
                          
                          509Total
      assets
                          
                          
                          2,336
                          
                          
                          
                          954LiabilitiesCurrent
      liabilities
                          
                          
                          86,047
                          
                          
                          
                          18,954Total
      liabilities
                          
                          
                          86,047
                          
                          
                          
                          18,954Net Assets
                          
                          $
                          (83,711
                          )
                          
                          $
                          (18,000
                          )





Pegasus
Tel, Inc.


Condensed
Statements of Income





2007
                
                
                2006Revenues
                
                $
                10,059
                
                
                $
                2,138Cost
      of sales
                
                
                (5,904
                )
                
                
                (6,601
                )Gross
      profit
                
                
                4,155
                
                
                
                4,463Operating
      income/(expense)
                
                
                (66,459
                )
                
                
                (11,973
                )Other
      expense interest
                
                
                (3,347
                )
                
                
                (95
                )Earnings
      before tax
                
                
                (65,651
                )
                
                
                (16,531
                )Tax
                
                
                (60
                )
                
                
                (65
                )Net
      Income
                
                $
                (65,711
                )
                
                $
                (16,596
                )Earnings
      per share
                
                $
                (0.01
                )
                
                $
                (0.003
                )Weighted
      average shares outstanding
                
                
                5,100,000
                
                
                
                5,100,000


F-39


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





The
Company executed a disposition agreement with Petro China Co., Ltd to sell its
subsidiary Anping Weiye Gas Co., Ltd. for RMB 3,300,000 (approximately $433,230)
in June 2007. The Company has accounted for the disposition of the assets of
discontinued operation in accordance with SFAS 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”.  A gain of $10,950 was
recorded in the Company’s statement of operations for the fiscal year ended
December 31, 2007. The following table is a summary of its financial position
and result of operations as of and for the year ended December 31,
2007.





Anping
Weiye Gas Co., Ltd.


Condensed Balance Sheet
                            
                            Condensed Statement of IncomeAssets
                            
                            
                            
                            Sales
      revenue
                            
                            $
                            -Current
      assets
                            
                            $
                            653,474
                            
                            Cost
      of sales
                            
                            
                            -Non-current
      assets
                            
                            
                            957
                            
                            Gross
      Profit
                            
                            
                            -Total
      assets
                            
                            
                            654,430Operating
      expense
                            
                            
                            -Liabilities
                            
                            
                            
                            
                            Other
      income/expense
                            
                            
                            -Current
      liabilities
                            
                            
                            7,897
                            
                            
                            
                            
                            -Total
      liabilities
                            
                            
                            7,897Gain
      on sale of assets
                            
                            
                            10,950Net Assets
                            
                            $
                            646,534
                            
                            Income
      tax
                            
                            
                            -Net
      Income
                            
                            $
                            10,950


F-40





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)




16.
            ACQUISITIONS





The
company had two acquisitions during 2006 consisting of the purchase of (1)
Zhanggiakou City Xiahuayuan Jinli Gas Co., Ltd., and (2) Yuxian Jinli Gas Co.,
Ltd.





On
December 13, 2006, the Company, through its Beijing Gas subsidiary, acquired all
the capital stock of Zhanggiakou City Xiahuayuan Jinli Gas Co., Ltd. from Jieli
Ma and Wei Zhang for a purchase price of RMB 2,000,000 (approximately $258,000)
in cash. Jieli Ma and Wei Zhang were individual shareholders who originally
owned 100% equity of Zhanggiakou City Xiahuayuan Jinli Gas Co., Ltd. Jieli Ma
and Wei Zhang were spouses, and both of them did not have any relationship with
the Company.





On
December 13, 2006, Beijing Gas acquired all the capital stock of Yuxian Jinli
Gas Co., Ltd. from Jieli Ma and Wei Zhang for a purchase price of RMB 9,500,000
(approximately $1,227,000) in cash. Jieli Ma and Wei Zhang were individual
shareholders who originally owned 100% equity of Yuxian Jinli Gas Co., Ltd.
There was no minority interest transaction involved in the 2006
acquisitions.





The
following tables are the condensed balance sheets of Xiahuayuan Jinli Gas and
Yuxian Jinli Gas as of December 13, 2006





Xiahuayuan
Gas and Yuxian Gas


Condensed
Balance Sheets


As
of December 13, 2006





Xiahuayuan
                          
                          
                          Yuxian
                          
                          
                          TotalAssetsCurrent
      AssetsOther
      receivables
                          
                          $
                          -
                          
                          
                          $
                          2,689
                          
                          
                          $
                          2,689Non-Current
      AssetsProperty,
      plan, & equipment, net
                          
                          
                          287,197
                          
                          
                          
                          885,091
                          
                          
                          
                          1,172,288Construction
      in Progress
                          
                          
                          -
                          
                          
                          
                          347,683
                          
                          
                          
                          347,683Total
      Assets
                          
                          
                          287,197
                          
                          
                          
                          1,235,464
                          
                          
                          
                          1,522,661LiabilitiesCurrent
      LiabilitiesAccounts
      payable
                          
                          
                          -
                          
                          
                          
                          27,863
                          
                          
                          
                          27,863Tax
      Payable
                          
                          
                          10,219
                          
                          
                          
                          439
                          
                          
                          
                          10,658Other
      payables
                          
                          
                          463
                          
                          
                          
                          1,616
                          
                          
                          
                          2,079Total
      Liabilities
                          
                          
                          10,682
                          
                          
                          
                          29,918
                          
                          
                          
                          40,600Net Assets
                          
                          $
                          276,515
                          
                          
                          $
                          1,205,546
                          
                          
                          $
                          1,482,061


F-41


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Goodwill /Acquisition Price
                
                
                Net Assets
                
                
                (Assets write down)Xiahuayuan
      Gas
                
                $
                258,000
                
                
                $
                276,515
                
                
                $
                (18,515
                )Yuxian
      Gas
                
                
                1,227,000
                
                
                
                1,205,546
                
                
                
                21,454Total
                
                $
                1,485,000
                
                
                $
                1,482,061
                
                
                $
                2,939





The
Company had three acquisitions during 2007 consisting of the purchase of (1)
Beijing Chenguang Gas Co., Ltd., (2) Guannan Weiye Gas Co., Ltd., and (3)
certain assets of Baishan Gas Co., Ltd.





On
January 15, 2007, Beijing Gas entered into a stock transfer agreement with the
shareholders of Beijing Chenguang Gas Ltd., Co., a limited liability company
organized under the laws of the PRC, under which Beijing Gas would acquire all
the capital stock of Beijing Chenguang for a purchase price of RMB 26 million
(approximately $3.35 million) in cash. Upon consummation of the transactions
contemplated by that agreement, Beijing Chenguang would become a wholly-owned
subsidiary of Beijing Gas. Beijing Chenguang is primarily engaged in the
development, transfer and licensing of technologies used in natural gas
purification, compression and transportation, as well as the installation of
natural gas equipment and the supply of natural gas.





On June
20, 2007, the Company, through its Beijing Gas subsidiary, acquired 100%
interests in Guannan Weiye Gas Co., Ltd. for RMB 7,000,000 (approximately $987
thousand) by cash, among which $562,968 was used to settle Guannan Gas’
outstanding loans, so that Guannan Gas became a wholly-owned subsidiary of the
Company. Guannan Gas is a regional natural gas distributor and developer of
natural gas distribution networks in China’s Jiangsu Province. The acquisition
of Guannan includes all of the assets and customer relationships of Guannan Gas,
including concession rights to be the exclusive natural gas distributor in
Guannan County, Jiangsu Province, for a period of 30 years beginning from June
29, 2007.





On July
9, 2007, the Company purchased certain assets of Baishan Gas Co., Ltd., a
regional distributor and developer of distribution networks for natural gas in
Jilin Province, for a price of RMB 7,000,000 (approximately $921 thousand).
Under the asset purchase agreement, the Company was responsible for paying
outstanding debts of Baishan Gas Co., Ltd. for $4,000,000, which was due in
periodic installments through the year 2030.





The
following tables are the condensed balance sheets of Chenguang Gas and Guannan
Gas as of December 31, 2006.


F-42





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Chenguang
Gas and Guannan Gas


Condensed
Balance Sheets


As
of December 31, 2006





Chenguang
                          
                          
                          Guannan
                          
                          
                          TotalAssetsCurrent
      AssetsCash
      and cash equivalent
                          
                          $
                          484,653
                          
                          
                          $
                          1,207
                          
                          
                          $
                          485,860Other
      receivables
                          
                          
                          533,501
                          
                          
                          
                          -
                          
                          
                          
                          533,501Inventory
                          
                          
                          89,806
                          
                          
                          
                          61,987
                          
                          
                          
                          151,793Non-Current
      AssetsProperty,
      plan, & equipment, net
                          
                          
                          2,569,684
                          
                          
                          
                          537,953
                          
                          
                          
                          3,107,637Construction
      in progress
                          
                          
                          713,119
                          
                          
                          
                          -
                          
                          
                          
                          713,119Total
      Assets
                          
                          
                          4,390,762
                          
                          
                          
                          601,147
                          
                          
                          
                          4,991,909LiabilitiesCurrent
      LiabilitiesLoans
                          
                          
                          255,836
                          
                          
                          
                          562,968
                          
                          
                          
                          818,804Other
      payables
                          
                          
                          1,911,214
                          
                          
                          
                          1,207
                          
                          
                          
                          1,912,421Total
      Liabilities
                          
                          
                          2,167,050
                          
                          
                          
                          564,175
                          
                          
                          
                          2,731,225Net Assets
                          
                          $
                          2,223,712
                          
                          
                          $
                          36,972
                          
                          
                          $
                          2,260,684





Proceedsusedto settleAcquisitionPrice
                  
                  
                  Loans
                  
                  
                  NetAssets
                  
                  
                  GoodwillChenguang
      Gas
                  
                  $
                  3,350,000
                  
                  
                  $
                  -
                  
                  
                  $
                  2,223,712
                  
                  
                  $
                  1,126,288Guannan
      Gas
                  
                  
                  987,000
                  
                  
                  
                  562,968
                  
                  
                  
                  36,972
                  
                  
                  
                  387,060Total
                  
                  $
                  4,337,000
                  
                  
                  $
                  562,968
                  
                  
                  $
                  2,260,684
                  
                  
                  $
                  1,513,348





The
following tabulations were retroactive restatements of pro forma consolidated
balance sheets as of December 31, 2007 and 2006, and the statements of income
for the years then ended. The retroactive restatements were based on the
assumption that the acquisitions of Chenguang Gas and Guannan Gas were made at
the beginning of 2006 for the purpose of trading and comparative
analysis.


F-43


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





Sino
Gas International Holdings, Inc.


Pro
forma Condensed Consolidated Balance Sheets





2006
                      
                      
                      2007SinoGas
                      
                      
                      Chenguang
                      
                      
                      Guannan
                      
                      
                      Total
                      
                      
                      SinoGasAssetsCurrent
      assets
                      
                      $
                      15,249,331
                      
                      
                      $
                      584,277
                      
                      
                      $
                      12,811
                      
                      
                      $
                      15,846,419
                      
                      
                      $
                      23,191,305Non-current
      assets
                      
                      
                      18,633,465
                      
                      
                      
                      5,489,774
                      
                      
                      
                      622,793
                      
                      
                      
                      24,746,032
                      
                      
                      
                      42,164,945Total
      assets
                      
                      
                      33,882,796
                      
                      
                      
                      6,074,051
                      
                      
                      
                      635,604
                      
                      
                      
                      40,592,451
                      
                      
                      
                      65,356,250LiabilitiesCurrent
      liabilities
                      
                      
                      8,568,483
                      
                      
                      
                      2,104,579
                      
                      
                      
                      320,268
                      
                      
                      
                      10,993,330
                      
                      
                      
                      16,365,964Total
      liabilities
                      
                      
                      8,568,483
                      
                      
                      
                      2,104,579
                      
                      
                      
                      320,268
                      
                      
                      
                      10,993,330
                      
                      
                      
                      16,365,964Net Assets
                      
                      $
                      25,314,313
                      
                      
                      $
                      3,969,472
                      
                      
                      $
                      315,336
                      
                      
                      $
                      29,599,121
                      
                      
                      $
                      48,990,286





Sino
Gas International Holdings, Inc.


Pro
forma Condensed Consolidated Statements of Income





2007twelve months
                  
                  
                  six months ended JuneSinoGas
                  
                  
                  Guannan
                  
                  
                  TotalSales
      revenue
                  
                  $
                  20,267,756
                  
                  
                  $
                  68,551
                  
                  
                  $
                  20,336,307Cost
      of revenue
                  
                  
                  (9,499,752
                  )
                  
                  
                  (40,367
                  )
                  
                  
                  (9,540,119
                  )Gross
      profit
                  
                  
                  10,768,004
                  
                  
                  
                  28,184
                  
                  
                  
                  10,796,188Operating
      expenses
                  
                  
                  (2,715,219
                  )
                  
                  
                  (52,630
                  )
                  
                  
                  (2,767,849
                  )Other
      income/(expense)
                  
                  
                  176,136
                  
                  
                  
                  (1,199
                  )
                  
                  
                  174,937Earnings
      from continued operation
                  
                  
                  8,228,921
                  
                  
                  
                  (25,645
                  )
                  
                  
                  8,203,276Income
      tax
                  
                  
                  (532,500
                  )
                  
                  
                  (1,131
                  )
                  
                  
                  (533,631
                  )Gain
      from discontinued operation
                  
                  
                  10,950
                  
                  
                  
                  -
                  
                  
                  
                  10,950Net
      income
                  
                  $
                  7,707,370
                  
                  
                  $
                  (26,776
                  )
                  
                  $
                  7,680,595


F-44


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





2006Sino Gas
                  
                  
                  Chenguang
                  
                  
                  Guannan
                  
                  
                  TotalSales
      revenue
                  
                  $
                  10,870,718
                  
                  
                  $
                  4,084,700
                  
                  
                  $
                  16,981
                  
                  
                  $
                  14,972,399Cost
      of revenue
                  
                  
                  (4,389,142
                  )
                  
                  
                  (2,849,441
                  )
                  
                  
                  (10,576
                  )
                  
                  
                  (7,249,158
                  )Gross
      profit
                  
                  
                  6,481,576
                  
                  
                  
                  1,235,260
                  
                  
                  
                  6,405
                  
                  
                  
                  7,723,241Operating
      expenses
                  
                  
                  (1,251,628
                  )
                  
                  
                  (477,981
                  )
                  
                  
                  (45,329
                  )
                  
                  
                  (1,774,938
                  )Other
      income/(expense)
                  
                  
                  266,625
                  
                  
                  
                  26,787
                  
                  
                  
                  (226
                  )
                  
                  
                  293,186Earnings
      before tax
                  
                  
                  5,496,573
                  
                  
                  
                  784,066
                  
                  
                  
                  (39,150
                  )
                  
                  
                  6,241,489Income
      tax
                  
                  
                  (423,284
                  )
                  
                  
                  (42,754
                  )
                  
                  
                  -
                  
                  
                  
                  (466,038
                  )Net
      income
                  
                  $
                  5,073,289
                  
                  
                  $
                  741,311
                  
                  
                  $
                  (39,150
                  )
                  
                  $
                  5,775,451


F-45


SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)





17.
            EARNINGS
      PER SHARE





Components of basic and diluted earnings per share were as follows:





2007
                
                
                2006Net
      Income
                
                $
                7,707,370
                
                
                $
                5,073,289Preferred
      Dividends
                
                
                -
                
                
                
                -Constructive
      Preferred Dividends
                
                
                (1,264,500
                )
                
                
                (6,418,864
                )Income
      Available to Common Stockholders
                
                $
                6,442,870
                
                
                $
                (1,345,575
                )Original
      Shares
                
                
                14,693,186
                
                
                
                14,693,186Addition
      to Common Stock from Offering
                
                
                3,182,892
                
                
                
                -Basic
      Weighted Average Shares Outstanding
                
                
                17,876,078
                
                
                
                14,693,186Addition
      to Common Stock from Conversion of Preferred Stock B
                
                
                4,044,407
                
                
                
                1,005,817Addition
      to Common Stock from Conversion of Preferred Stock B-1
                
                
                23,855
                
                
                
                -Addition
      to Common Stock from Exercise of Warrants
                
                
                597,571
                
                
                
                -Diluted
      Weighted Average Shares Outstanding
                
                
                22,541,911
                
                
                
                15,699,003Earnings
      Per ShareBasic
                
                $
                0.36
                
                
                $
                (0.09
                )Diluted
                
                $
                0.34
                
                
                $
                (0.09
                )Weighted
      Average Shares OutstandingBasic
                
                
                17,876,078
                
                
                
                14,693,186Diluted
                
                
                22,541,911
                
                
                
                15,699,003


F-46





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)




18.
              INVESTORS
      RELATIONS STOCK COMPENSATION
EXPENSE





Pursuant
to paragraph 26 of SFAS 154, the Company disclosed the stock compensation
transaction as follows:





On
November 2, 2006, the Company granted 100,000 stock options to the investors
relation firm, CCG Elite at a cost $92,468 which was charged to other expense in
the income statement and was credited to accrued liabilities. The incorporation
of this stock transaction has the impact of decreasing the current year’s net
income by $92,468 or $0,0037 per share using the weighted average of
24,877,271 shares. No U.S. tax is affected since the Company has not repatriated
its earnings to the United States.





The
determination of the exercise price is depicted by the following table based on
the Black-Scholes Model.





PriceRange
                          
                          NumberofShares$0 - $9.99
                          
                          100,000 shares$10.00
      - $19.99
                          
                          0
      shares$20.00
      - $29.99
                          
                          0
      shares





Weighted-average
      fair value of grants:
                
                $
                0.92Risk-free
      interest rate:
                
                
                4.176
                %Expected
      volatility:
                
                
                40.00
                %Expected
      life in months:
                
                48 months





No tax
benefit has yet to be accrued or realized. In 2007, the Company operated as an
income tax-free entity in the PRC, and the Company has yet to repatriate its
earnings, accordingly it has not recognized any deferred tax assets or liability
in regards to benefits derived from the issuance of stock
options.


F-47





SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2007 AND 2006


(Stated
in U.S. Dollars)




19.
            SUBSEQUENT
      EVENT





The
Company entered into a registration rights agreement related to a private
placement financing transaction with accredited investors on September 13,
2007.  Pursuant to the agreement, the Company would be subject to
liquidated damages if the registration statement was not (1) filed within 45
days of the execution, and (2) if the registration statement had not been
declared effective within 150 days of filing the registration
statement.  The Company has not met the aforementioned requirements
under the registration rights agreement, and currently believes that it would be
liable to pay $462,912 in liquidated damages to the investors in
2008.





20.
            CONTINGENT
      LIABILITIES





Pursuant
to the warrants purchase agreement related to 2006 private placement financing
transactions, the Company was required to reach $5.7 million and $7.9 million
net income target for the fiscal years ended 2006 and 2007 respectively.
However, the Company did not meet the stipulated 2006 and 2007 net income target
and therefore incurred certain contingent liabilities. The Company has issued
321,168 shares make good common stock to investors in July 2007 in compensation
of not attaining the 2006 net income target; this common stock issuance
transaction of $321 being a charge against additional paid in capital, has been
recognized in the 2007 financial statements. The Company is also liable to issue
another 1.2 million shares make good common stock to the accredited investors in
2008 in compensation of not attaining the 2007 net income
target.


F-48